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When Overconfident Traders Meet Feedback Traders - Updated from 2016

Author

Listed:
  • Fabrice Rousseau

    (Economics, National University of Ireland, Maynooth)

  • Herve Boco

    (TBS Business School)

  • Laurent Germain

    (TBS Business School)

Abstract

We develop a model in which informed overconfident market participants and informed rational speculators trade against trend-chasers. In line with empirical findings we find a positive relationship between the volatility of prices and the size of the price reversal. We obtain that this result depends on different parameters of the model such as the number of positive feedback traders, how overconfident traders perceive the information of others, as well as the number of informed traders present in the model. In addition we obtain that the presence of positive feedback traders leads to a higher degree of trading activity by both types of informed traders. We also get that overconfidence may lead to lower price volatility and more efficient prices. We obtain that overconfident traders may be better off than their rational counterparts.

Suggested Citation

  • Fabrice Rousseau & Herve Boco & Laurent Germain, 2020. "When Overconfident Traders Meet Feedback Traders - Updated from 2016," Economics Department Working Paper Series n270-16.pdf, Department of Economics, National University of Ireland - Maynooth.
    • Handle: RePEc:may:mayecw:n270-16.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Overconfidence; Positive Feedback Trading; Excess Volatility; Market Efficiency; Computer Based Trading; Algorithmic Trading.;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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