Ambiguity-Aversion in a Single Auction Market

Within Kyle's single auction model, we show that an ambiguity-averse insider, who is uncertain about the market maker's beliefs, implements a robust trading strategy, so that she selects as her market order that which maximizes her expected profits against those beliefs which penalize her most. Her trading strategy is equivalent to that of a risk-averse insider who does not face any Knightian uncertain. As she finds it optimal to trade less aggressively and reveal her private information at a slower pace than her risk-neutral counterpart, ambiguity-aversion reduces market efficiency but improves market liquidity