Overconfidence and Correlated Information Structures

Junghum Park

No 116, Bank of Lithuania Working Paper Series from Bank of Lithuania

Abstract: This paper analyzes a model of multiple overconfident traders submitting market orders where traders’ private information is subject to correlated errors, as well as its extension to endogenous information. We consider two standard types of overconfidence: overconfidence in own signals and underconfidence in others’ signals. The analyses on the effects of overconfidence on traders’ behavior and the equilibrium price suggest that these effects are richer than our typical understanding of overconfidence focusing on its positive effect on trading volume as follows: First, trading volume may increase or decrease with overconfidence depending on its type. Second, these different types of overconfidence may differ radically on the patterns of trading volume and price informativeness with respect to the number of traders. Third, overconfidence can cause equilibrium multiplicity in information acquisition.

Keywords: Overconfidence; Disagreement; Strategic trading; Information aggregation; Efficient market hypothesis (search for similar items in EconPapers)
JEL-codes: G11 G14 G4 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2023-09-13
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.lb.lt/uploads/publications/docs/42634_ ... 384f503b9e6c8208.pdf Full text (application/pdf)
Our link check indicates that this URL is bad, the error code is: 403 Forbidden

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: https://EconPapers.repec.org/RePEc:lie:wpaper:116

Access Statistics for this paper

More papers in Bank of Lithuania Working Paper Series from Bank of Lithuania Bank of Lithuania Gedimino pr. 6, LT-01103 Vilnius, Lithuania. Contact information at EDIRC.
Bibliographic data for series maintained by Aurelija Proskute ().