Limit Orders and Knightian Uncertainty

35 Pages Posted: 7 Apr 2020 Last revised: 21 Dec 2021

See all articles by Michael Greinecker

Michael Greinecker

affiliation not provided to SSRN

Christoph Kuzmics

University of Graz - Department of Economics

Date Written: December 21, 2021

Abstract

A range of empirical puzzles in finance has been explained as a consequence of traders being averse to ambiguity. Ambiguity averse traders can behave in financial portfolio problems in ways that cannot be rationalized as maximizing subjective expected utility. However, this paper shows that when traders have access to limit orders, all investment behavior of an ambiguity-averse decision-maker is observationally equivalent to the behavior of a subjective expected utility maximizer with the same risk preferences; ambiguity aversion has no additional explanatory power.

Keywords: Knightian uncertainty, ambiguity aversion, subjective expected utility, financial market participation, strict dominance

JEL Classification: D81, G11, C72

Suggested Citation

Greinecker, Michael and Kuzmics, Christoph, Limit Orders and Knightian Uncertainty (December 21, 2021). Available at SSRN: https://ssrn.com/abstract=3555828 or http://dx.doi.org/10.2139/ssrn.3555828

Michael Greinecker

affiliation not provided to SSRN

Christoph Kuzmics (Contact Author)

University of Graz - Department of Economics ( email )

Universitaetsstrasse 15
RESOWI - F4
Graz, 8010
Austria

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