Limit Orders and Knightian Uncertainty
ABSTRACT A wide variety of financial instruments allows risk‐averse traders to reduce their exposure to risk. This raises the question of what financial instruments allow ambiguity‐averse traders to reduce their exposure to ambiguity. We show in this paper that price‐contingent orders, such as limit orders, are sufficient: In a two‐period trading model, an ambiguity‐averse trader who trades with limit orders is observationally indistinguishable from an ambiguity‐neutral trader with the same risk preferences.
Authors
- Christoph Kuzmics (ORCID: https://orcid.org/0000-0003-2732-2838)
- Michael Greinecker
Institutions
- University of Graz (AT)
- Université Paris-Saclay (FR)
- CEA Paris-Saclay - Etablissement de Saclay (FR)
- CEA Paris-Saclay (FR)
Publication Details
- Journal
- International Economic Review
- Published
- 2025-08-26
- DOI
- https://doi.org/10.1111/iere.70015
- Primary Topic
- Decision-Making and Behavioral Economics
- Type
- article
- Field-Weighted Citation Impact
- 0.00
Funders
- California Institute of Technology
- University of Minnesota
- Universität Bielefeld
- Università Bocconi
- Karl-Franzens-Universität Graz
- University of California, Irvine