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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 present a model of a financial market where some traders are "cursed" when investing in a risky asset, failing to fully appreciate what prices convey about others' private information. Markets comprising cursed traders generate more trade than those comprising rationals; mixed markets can generate even more trade because rationals exploit return predictability caused by cursed. Per-trader volume in cursed markets increases with market size; volume may instead disappear when traders infer others' information from prices but dismiss it as noisier than their own. Public-information revelation raises rational and"dismissive" volume, but lowers cursed volume given moderate non-informational trading motives.

JEL-codes: D82 G00 G11 G12 (search for similar items in EconPapers)
Pages: 73 pages
Date: 2017-08-06
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Downloads: (external link)
http://eprints.lse.ac.uk/118956/ Open access version. (application/pdf)

Related works:
Journal Article: Financial Markets Where Traders Neglect the Informational Content of Prices (2019) Downloads
Working Paper: Financial markets where traders neglect the informational content of prices (2019) Downloads
Working Paper: Financial Markets where Traders Neglect the Informational Content of Prices (2015) Downloads
Working Paper: Financial Markets where Traders Neglect the Informational Content of Prices (2015) Downloads
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