000			02834cam a22003377 4500
001			w8683
003			NBER
005			20211020113256.0
006			m o d
007			cr cnu||||||||
008			210910s2001 mau fo 000 0 eng d
100	1		_aRoutledge, Bryan R. _919820
245	1	0	_aModel Uncertainty and Liquidity / _cBryan R. Routledge, Stanley E. Zin.
260			_aCambridge, Mass. _bNational Bureau of Economic Research _c2001.
300			_a1 online resource: _billustrations (black and white);
490	1		_aNBER working paper series _vno. w8683
500			_aDecember 2001.
520	3		_aExtreme market outcomes are often followed by a lack of liquidity and a lack of trade. This market collapse seems particularly acute for markets where traders rely heavily on a specific empirical model such as in derivative markets. Asset pricing and trading, in these cases, are intrinsically model dependent. Moreover, the observed behavior of traders and institutions that places a large emphasis on 'worst-case scenarios'' through the use of 'stress testing'' and 'value-at-risk'' seems different than Savage rationality (expected utility) would suggest. In this paper we capture model-uncertainty explicitly using an Epstein-Wang (1994) uncertainty-averse utility function with an ambiguous underlying asset-returns distribution. To explore the connection of uncertainty with liquidity, we specify a simple market where a monopolist financial intermediary makes a market for a propriety derivative security. The market-maker chooses bid and ask prices for the derivative, then, conditional on trade in this market, chooses an optimal portfolio and consumption. We explore how uncertainty can increase the bid-ask spread and, hence, reduces liquidity. In addition, 'hedge portfolios'' for the market-maker, an important component to understanding spreads, can look very different from those implied by a model without Knightian uncertainty. Our infinite-horizon example produces short, dramatic decreases in liquidity even though the underlying environment is stationary.
530			_aHardcopy version available to institutional subscribers
538			_aSystem requirements: Adobe [Acrobat] Reader required for PDF files.
538			_aMode of access: World Wide Web.
588	0		_aPrint version record
690		7	_aG10 - General _2Journal of Economic Literature class.
690		7	_aG13 - Contingent Pricing • Futures Pricing _2Journal of Economic Literature class.
700	1		_aZin, Stanley E. _923330
710	2		_aNational Bureau of Economic Research.
830		0	_aWorking Paper Series (National Bureau of Economic Research) _vno. w8683.
856	4	0	_uhttps://www.nber.org/papers/w8683
856			_yAcceso en línea al DOI _uhttp://dx.doi.org/10.3386/w8683
942			_2ddc _cW-PAPER
999			_c339509 _d298071