Irrational confidence, imperfect and long-lived information

Deqing Zhou

International Review of Economics & Finance, 2013, vol. 27, issue C, 383-405

Abstract: We analyze a dynamic framework where an informed agent overestimates or underestimates the precision of his noisy private signal. We investigate the effect of the insider's belief on equilibrium results such as the price informativeness, the liquidity cost, the trading strategy and the expected trading volume. Interestingly, we find that irrationality can yield contrarian trading in the sense that the two successive order imbalances are negatively correlated. Thus, irrationality, distinguished from dissimulation and manipulation, may underlie insiders' trading decisions.

Keywords: Informed trading; Information asymmetry; Overconfidence; Contrarian trading (search for similar items in EconPapers)
JEL-codes: C72 D82 G14 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:27:y:2013:i:c:p:383-405

DOI: 10.1016/j.iref.2012.11.004

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