Ambiguity aversion, funding liquidity, and liquidation dynamics

This paper examines how ambiguity aversion and funding liquidity affect market dynamics when a large strategic trader is forced to liquidate. More specifically, the paper explores how ambiguity over an asset's value affects liquidation dynamics when ambiguity-averse traders follow maxmin utility. I also present the joint effects of ambiguity and limited funding liquidity on this liquidation process. The findings reveal that the presence of ambiguity leads to the emergence of a 'no-trade region.' This lack of trading activity under ambiguity becomes more prominent as the ambiguous support widens, and interestingly, as the initial wealth of the distressed strategic trader increases.