Limit Orders and Knightian Uncertainty
Michael Greinecker
(ENS Paris-Saclay)
&
Christoph Kuzmics
(University of Graz, Austria)
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.
