Skip to main content
eScholarship
Open Access Publications from the University of California

Equilibrium pricing and trading volume under preference uncertainty

  • Author(s): Biais, B
  • Hombert, J
  • Weill, PO
  • et al.

Published Web Location

https://sites.google.com/site/pierreolivierweill/tradingandliquidity.pdf?attredirects=0
No data is associated with this publication.
Abstract

© The Author 2014. Information collection and processing in 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 inefficiency, but need not reduce prices. Progressively learning about preferences generate round-trip trades, which increase 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.

Many UC-authored scholarly publications are freely available on this site because of the UC Academic Senate's Open Access Policy. Let us know how this access is important for you.

Item not freely available? Link broken?
Report a problem accessing this item