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Rebels, Conformists, Contrarians And Momentum Traders

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  • Evan Gatev
  • Stephen Ross
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    Abstract

    We consider investing in a noisy market with incorrect beliefs about predictability. Two types of agents use subjective models to optimize their portfolios - "conformists" who happen to believe in the self-fulfilling market consensus and "rebels" who have wrong beliefs. We compare the agents' dynamic trading and their empirically observable investment performance. An agent who believes in log-normality is always a contrarian trader, who buys more shares after the price goes down, and sells shares when the price goes up. In contrast, an agent who believes in price predictability acts as a momentum trader, who buys more shares after the price goes up, for a range of subjective market mis-pricings. We show th

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    File URL: http://icfpub.som.yale.edu/publications/2566
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    Bibliographic Info

    Paper provided by Yale School of Management in its series Yale School of Management Working Papers with number ysm137.

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    Date of creation: 01 Apr 2000
    Date of revision: 01 Jan 2003
    Handle: RePEc:ysm:somwrk:ysm137

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    Web page: http://icf.som.yale.edu/
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    1. Dybvig, Philip H & Rogers, L C G, 1997. "Recovery of Preferences from Observed Wealth in a Single Realization," Review of Financial Studies, Society for Financial Studies, vol. 10(1), pages 151-74.
    2. James M. Poterba & Lawrence H. Summers, 1987. "Mean Reversion in Stock Prices: Evidence and Implications," NBER Working Papers 2343, National Bureau of Economic Research, Inc.
    3. He, Hua & Leland, Hayne, 1993. "On Equilibrium Asset Price Processes," Review of Financial Studies, Society for Financial Studies, vol. 6(3), pages 593-617.
    4. Wachter, Jessica A., 2002. "Portfolio and Consumption Decisions under Mean-Reverting Returns: An Exact Solution for Complete Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 37(01), pages 63-91, March.
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    Cited by:
    1. Eric Hillebrand, 2005. "Mean Reversion Expectations and the 1987 Stock Market Crash: An Empirical Investigation," Finance 0501015, EconWPA.

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