Dynamic Trading When You May Be Wrong

Alexander Remorov

MPRA Paper from University Library of Munich, Germany

Abstract: I analyze a model with heterogeneous investors who have incorrect beliefs about fundamentals. Investors think that they are right at first, but over time realize that they are wrong. The speed of the realization depends on investor confidence in own beliefs and arrival of new information. The model provides a tractable and clear link for how changing opinions translate into equilibrium dynamics for price, holdings, and expected profits. I am able to generate a wide range of realistic market behaviors, including momentum and reversals, as well as support and resistance levels in prices due to investors being reluctant to admit they are wrong.

Keywords: Asset Pricing; Learning; Being Wrong; Heterogeneous Beliefs; Behavioral Finance (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 (search for similar items in EconPapers)
Date: 2015-04-27, Revised 2015-04-27
New Economics Papers: this item is included in nep-mic and nep-mst
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