Ambiguity in Financial Markets: Herding and Contrarian Behaviour

J L Ford, David Kelsey and W Pang

Discussion Papers from Department of Economics, University of Birmingham

Abstract: The paper studies the impact of ambiguity on history-dependant beahviour in the standard microstructure model of financial markets. We show that differences in ambiguity attitudes between market makers and traders can generate contrarian and herding behaviour in stock markets where assets are traded sequentially and trading prices are endogenously determined. We also show the mispricing can be only short-term, and in the long-run market is efficient in the sense that the market price aggregates information without distortions.

Keywords: Ambiguity; Choquet Expected Utility; Generalized Bayesian update; Optimism; Herding; Contrarian behaviour (search for similar items in EconPapers)
JEL-codes: D81 G1 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2005-05
New Economics Papers: this item is included in nep-fin and nep-fmk
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:bir:birmec:05-11

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