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The concept of model uncertainty is one of increasing importance in the field of Mathematical Finance. The main goal of this work is to explore model uncertainty in the specific area of algorithmic and high frequency trading. From a behavioural perspective, model uncertainty naturally leads to...
Persistent link: https://www.econbiz.de/10013043893
The effect of four distinct market events on investor risk aversion is evaluated using options data on the WTI crude oil futures contract during the 2007-2011 period. The risk aversion function and the stochastic discount factor (SDF) are estimated using parametric approaches before and after...
Persistent link: https://www.econbiz.de/10013090498
We consider an optimal execution problem where an agent holds a position in an asset which must be liquidated (using limit orders) before a terminal horizon. Beginning with a standard model for the trading dynamics, we analyse how the acknowledgement of model misspecification affects the agent's...
Persistent link: https://www.econbiz.de/10012959444
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It is shown how to test revealed preference data on choices under uncertainty for consistency with first and second order stochastic dominance (FSD or SSD). The axiom derived for SSD is a necessary and sufficient condition for risk aversion. If an investor is risk averse, stochastic dominance...
Persistent link: https://www.econbiz.de/10014175928
This paper explores the relationship between linguistic variation and individual attitudes toward risk and uncertainty. We propose an innovative marker that classifies languages according to the number of non-indicative moods in the grammatical contexts involving uncertainty. We find that...
Persistent link: https://www.econbiz.de/10012903730
behave according to expected-utility theory, the risk-attitude adjustment corresponds to an average increase of 1 in their …
Persistent link: https://www.econbiz.de/10013147749
at testing whether agents make investment decisions according to expected utility, cumulative prospect theory (Tversky …-Kahneman, 1992) or optimal expectations theory (Brunnermeier and Parker, 2005, Brunnermeier et al., 2007) when they face skewed … distributions of returns. We show that more than 56% of the 245 participants obey optimal expectations theory. They choose a …
Persistent link: https://www.econbiz.de/10013155786
Risk aversion is as prevalent as it is expensive. For financial traders this is especially true. This paper proposes a solution for alleviating the behavior using a model implied from experiments on myopic loss aversion and tests the model on retail currency traders from a large online database....
Persistent link: https://www.econbiz.de/10013051429