Equilibrium Pricing and Trading Volume under Preference Uncertainty

Biais, Bruno, Hombert, Johan and Weill, Pierre-Olivier (2014) Equilibrium Pricing and Trading Volume under Preference Uncertainty. Review of Economic Studies, vol.81 (n°4). pp. 1401-1437.

This is the latest version of this item.

Download (805kB) | Preview
Official URL: http://tse-fr.eu/pub/27850


Information collection, processing and dissemination financial institutions is challenging.
This can delay the observation by traders of the exact capital charges and constraints
of their institution. During this delay, traders face preference uncertainty. In
this context, we study optimal trading strategies and equilibrium prices in a continuous
centralized market. We focus on liquidity shocks, during which preference uncertainty is
likely to matter most. Preference uncertainty generates allocative ineficiency, but need
not reduce prices. Traders progressively learning about the preferences of their institution
conduct round-trip trades, which generate excess volume relative to the frictionless market.
In a cross section of liquidity shocks, the initial price drop is positively correlated with
total trading volume. Across traders, the number of round-trips is negatively correlated
with trading profits and average inventory.

Item Type: Article
Language: English
Date: 2014
Refereed: Yes
Uncontrolled Keywords: Information processing, Trading volume, Liquidity shock, Preference uncertainty, Equilibrium pricing
JEL codes: D81 - Criteria for Decision-Making under Risk and Uncertainty
G12 - Asset Pricing; Trading volume; Bond Interest Rates
Divisions: TSE-R (Toulouse), TSM Research (Toulouse)
Site: UT1
Date Deposited: 16 Mar 2015 14:43
Last Modified: 14 Mar 2018 10:14
OAI ID: oai:tse-fr.eu:27850
URI: http://publications.ut-capitole.fr/id/eprint/16497

Available Versions of this Item

Actions (login required)

View Item View Item


Downloads per month over past year