Biais, Bruno, Hombert, Johan and Weill, Pierre-Olivier (2013) Equilibrium Pricing and Trading Volume under Preference Uncertainty. TSE Working Paper, n. 13-422, Toulouse

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Abstract

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.

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• Equilibrium Pricing and Trading Volume under Preference Uncertainty. (deposited 09 Jul 2014 17:37) [Currently Displayed]
  • Equilibrium Pricing and Trading Volume under Preference Uncertainty. (deposited 16 Mar 2015 14:43)