Financial markets where traders neglect the informational content of prices

Erik Eyster, Matthew Rabin and Dimitri Vayanos

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: We model a financial market where some traders of a risky asset do not fully appreciate what prices convey about others' private information. Markets comprising solely such “cursed” traders generate more trade than those comprising solely rationals. Because rationals arbitrage away distortions caused by cursed traders, mixed markets can generate even more trade. Per-trader volume in cursed markets increases with market size; volume may instead disappear when traders infer others' information from prices, even when they dismiss it as noisier than their own. Making private information public raises rational and “dismissive” volume, but reduces cursed volume given moderate noninformational trading motives.

JEL-codes: G0 G00 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2019-02-01
New Economics Papers: this item is included in nep-mst
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Citations: View citations in EconPapers (26)

Published in Journal of Finance, 1, February, 2019, 74(1), pp. 371-399. ISSN: 0022-1082

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http://eprints.lse.ac.uk/87477/ Open access version. (application/pdf)

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 (2017)
Working Paper: Financial Markets where Traders Neglect the Informational Content of Prices (2015)
Working Paper: Financial Markets where Traders Neglect the Informational Content of Prices (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:87477

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