Economics at your fingertips  

When Overconfident Traders Meet Feedback Traders

Hervé Boco, Laurent Germain and Fabrice Rousseau

Finance, 2021, vol. 42, issue 3, 7-55

Abstract: We develop a model in which both overconfident informed market participants and rational informed speculators trade against trend chasers. In this model, positive feedback traders act like computer-based traders and generate positive feedback loops. In line with empirical findings, we report a positive relationship between the volatility of prices and the size of the price reversal. The presence of positive feedback traders leads to a higher degree of trading activity by both types of informed trader. Overconfidence can lead to less price volatility and more efficient prices. Moreover, overconfident traders may be better off than their rational counterparts.

Keywords: overconfidence; positive feedback trading; excess volatility; market algorithmic trading (search for similar items in EconPapers)
Date: 2021
References: Add references at CitEc
Citations: Track citations by RSS feed

Downloads: (external link) (application/pdf) (text/html)

Related works:
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:

Access Statistics for this article

More articles in Finance from Presses universitaires de Grenoble
Bibliographic data for series maintained by Jean-Baptiste de Vathaire ().

Page updated 2021-12-02
Handle: RePEc:cai:finpug:fina_423_0007