Financial Markets where Traders Neglect the Informational Content of Prices

Dimitri Vayanos, Matthew Rabin and Erik Eyster

No 10629, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We present a model of a financial market where some traders are ``cursed'' when choosing how much to invest in a risky asset, failing to fully take into account what prices convey about others' private information. Cursed traders put more weight on their private signals than rational traders. But because they neglect that the price encodes other traders' information, prices depend less on private signals and more on public signals than rational-expectation-equilibrium (REE) prices. Markets comprised entirely of cursed traders generate more trade than those comprised entirely of rationals; mixed markets can generate even more trade, as rationals employ momentum-trading strategies to exploit cursed traders. We contrast our results to other models of departures from REE and show that per-trader volume with cursed traders increases when the market becomes large, while natural forms of overconfidence predict that volume should converge to zero.

Keywords: Behavioral finance; Cursedness; Financial markets; Overconfidence; Return predictability; Trading volume (search for similar items in EconPapers)
JEL-codes: D53 D84 G02 G11 G12 G14 (search for similar items in EconPapers)
Date: 2015-05
New Economics Papers: this item is included in nep-cfn and nep-mst
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

Downloads: (external link)
https://cepr.org/publications/DP10629 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Journal Article: Financial Markets Where Traders Neglect the Informational Content of Prices (2019)
Working Paper: Financial markets where traders neglect the informational content of prices (2019)
Working Paper: Financial markets where traders neglect the informational content of prices (2017)
Working Paper: Financial Markets where Traders Neglect the Informational Content of Prices (2015)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:10629

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP10629

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().