Article

Equilibrium Pricing and Trading Volume under Preference Uncertainty

Bruno Biais, Johan Hombert et Pierre-Olivier Weill

Résumé

Information collection, processing and dissemination 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 ineficiency, but need not reduce prices. Traders progressively learning about the preferences of their institution conduct round-trip trades, which generate excess 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.

Mots-clés

Information processing; Trading volume; Liquidity shock; Preference uncertainty; Equilibrium pricing;

Codes JEL

  • D81: Criteria for Decision-Making under Risk and Uncertainty
  • G12: Asset Pricing • Trading Volume • Bond Interest Rates

Remplace

Bruno Biais, Johan Hombert et Pierre-Olivier Weill, « Equilibrium Pricing and Trading Volume under Preference Uncertainty », TSE Working Paper, n° 13-422, 16 juillet 2013.

Référence

Bruno Biais, Johan Hombert et Pierre-Olivier Weill, « Equilibrium Pricing and Trading Volume under Preference Uncertainty », The Review of Economic Studies, vol. 81, n° 4, 2014, p. 1401–1437.

Publié dans

The Review of Economic Studies, vol. 81, n° 4, 2014, p. 1401–1437