The overconfident trader does not always overreact to his information

Sarina Du and Hong Liu

Economic Modelling, 2015, vol. 46, issue C, 384-390

Abstract: This article develops a strategic trading model in which the outsider is overconfident on the shared information. Our result shows that a more confident outsider underreacts to his information in the sense that he trades less aggressively on his information, leading to a less profit in the trading. However, the insider trades more aggressively on the shared information and less aggressively on the private information when he faces a more overconfident outsider. Also, the overconfidence of the outsider leads to a larger insider's expected profits, an increased expected loss of noise trader, and a less efficient and less stable market.

Keywords: Outsider; Shared information; Inside trading; Public information; Overconfidence; Nash equilibrium (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:46:y:2015:i:c:p:384-390

DOI: 10.1016/j.econmod.2015.02.009

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