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Rebels, Conformists, Contrarians And Momentum Traders

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  • Evan Gatev
  • Stephen Ross

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

Suggested Citation

  • Evan Gatev & Stephen Ross, 2000. "Rebels, Conformists, Contrarians And Momentum Traders," Yale School of Management Working Papers ysm137, Yale School of Management, revised 01 Jan 2003.
    • Handle: RePEc:ysm:wpaper:ysm137
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    File URL: https://repec.som.yale.edu/icfpub/publications/2566.pdf
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    Cited by:

    1. Eric Hillebrand, 2005. "Mean Reversion Expectations and the 1987 Stock Market Crash: An Empirical Investigation," Finance 0501015, University Library of Munich, Germany.

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    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G0 - Financial Economics - - General

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