Ambiguity in Financial Markets: Herding and Contrarian Behaviour
AbstractThe paper studies the impact of ambiguity on history-dependant beahviour in the standard microstructure model of financial markets. We show that differences in ambiguity attitudes between market makers and traders can generate contrarian and herding behaviour in stock markets where assets are traded sequentially and trading prices are endogenously determined. We also show the mispricing can be only short-term, and in the long-run market is efficient in the sense that the market price aggregates information without distortions.
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Bibliographic InfoPaper provided by Department of Economics, University of Birmingham in its series Discussion Papers with number 05-11.
Length: 41 pages
Date of creation: May 2005
Date of revision:
Ambiguity; Choquet Expected Utility; Generalized Bayesian update; Optimism; Herding; Contrarian behaviour;
Find related papers by JEL classification:
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- G1 - Financial Economics - - General Financial Markets
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-07-25 (All new papers)
- NEP-FIN-2005-07-25 (Finance)
- NEP-FMK-2005-07-25 (Financial Markets)
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