The effect of ambiguity on price formation and trading behavior in financial markets
- This paper sets up an experimental asset market in the laboratory to investigate the effects of ambiguity on price formation and trading behavior in financial markets. The obtained trading data is used to analyze the effect of ambiguity on various market outcomes (the price level, volatility, trading activity, market liquidity, and the degree of speculative trading) and to test the quality of popular empirical market-based measures for the degree of ambiguity. We find that ambiguity decreases market prices and trading activity; ambiguity leads to lower market liquidity through wider bid-ask spreads; and ambiguity leads to less speculative trading. We also find that popular market-based measures of ambiguity used in the empirical literature do not seem to correctly capture the true degree of ambiguity.
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| Author: | Wenhui Li, Peter Ockenfels, Christian Wilde |
|---|---|
| URN: | urn:nbn:de:hebis:30:3-616408 |
| URL: | https://ssrn.com/abstract=3963688 |
| DOI: | https://doi.org/10.2139/ssrn.3963688 |
| Parent Title (English): | SAFE working paper ; No. 326 |
| Series (Serial Number): | SAFE working paper (326) |
| Publisher: | SAFE |
| Place of publication: | Frankfurt am Main |
| Document Type: | Working Paper |
| Language: | English |
| Year of Completion: | 2021 |
| Year of first Publication: | 2021 |
| Publishing Institution: | Universitätsbibliothek Johann Christian Senckenberg |
| Release Date: | 2021/11/22 |
| Tag: | ambiguity; bid-ask spread; financial market; laboratory experiment; market price; market-based; measure of ambiguity; trading activity; volatility |
| Issue: | November 2, 2021 |
| Page Number: | 41 |
| HeBIS-PPN: | 488743281 |
| Institutes: | Wirtschaftswissenschaften / Wirtschaftswissenschaften |
| Wissenschaftliche Zentren und koordinierte Programme / House of Finance (HoF) | |
| Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS) | |
| Wissenschaftliche Zentren und koordinierte Programme / Sustainable Architecture for Finance in Europe (SAFE) | |
| Dewey Decimal Classification: | 3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft |
| Sammlungen: | Universitätspublikationen |
| Licence (German): |  Deutsches Urheberrecht |
