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Survival of Overconfidence in Currency Markets

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  • Oberlechner, Thomas
  • Osler, Carol

Abstract

This paper tests the influential hypothesis that irrational traders will be driven out of financial markets by trading losses. The paper’s main finding is that overconfident currency dealers are not driven out of the market. Dealers with extensive experience are neither more nor less overconfident than their junior colleagues. We set the stage for this investigation by providing evidence that currency dealers display two forms of overconfidence: They underestimate uncertainty, and they overestimate their professional success. This is notable because one might have expected the opposite: currency dealers face strong incentives for accuracy, they have access to comprehensive information, and they have extensive experience.

Suggested Citation

  • Oberlechner, Thomas & Osler, Carol, 2012. "Survival of Overconfidence in Currency Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 47(1), pages 91-113, February.
  • Handle: RePEc:cup:jfinqa:v:47:y:2012:i:01:p:91-113_00
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    7. Laurent Germain & Fabrice Rousseau & Anne Vanhems, 2014. "Irrational Market Makers," Finance, Presses universitaires de Grenoble, vol. 35(1), pages 107-145.
    8. Han, Liyan & Liu, Yang & Yin, Libo, 2019. "Uncertainty and currency performance: A quantile-on-quantile approach," The North American Journal of Economics and Finance, Elsevier, vol. 48(C), pages 702-729.
    9. Hsu, Po-Hsuan & Taylor, Mark P. & Wang, Zigan, 2016. "Technical trading: Is it still beating the foreign exchange market?," Journal of International Economics, Elsevier, vol. 102(C), pages 188-208.
    10. King, Michael R. & Osler, Carol L. & Rime, Dagfinn, 2013. "The market microstructure approach to foreign exchange: Looking back and looking forward," Journal of International Money and Finance, Elsevier, vol. 38(C), pages 95-119.
    11. Ellina, Polina & Mascarenhas, Briance & Theodossiou, Panayiotis, 2020. "Clarifying managerial biases using a probabilistic framework," Journal of Behavioral and Experimental Finance, Elsevier, vol. 27(C).
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    13. Egan, Daniel & Merkle, Christoph & Weber, Martin, 2014. "Second-order beliefs and the individual investor," Journal of Economic Behavior & Organization, Elsevier, vol. 107(PB), pages 652-666.
    14. Luis Santos-Pinto, 2020. "Human Capital Accumulation and the Evolution of Overconfidence," Games, MDPI, vol. 11(4), pages 1-19, October.
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    16. Hsu, Po-Hsuan & Taylor, Mark P, 2014. "Forty Years, Thirty Currencies and 21,000 Trading Rules: A Large-scale, Data-Snooping Robust Analysis of Technical Trading in the Foreign Exchange Market," CEPR Discussion Papers 10018, C.E.P.R. Discussion Papers.
    17. Markus Spiwoks & Kilian Bizer, 2018. "On the Measurement of Overconfidence: An Experimental Study," International Journal of Economics and Financial Research, Academic Research Publishing Group, vol. 4(1), pages 30-37, 01-2018.
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    20. Kendall, Chad & Oprea, Ryan, 2018. "Are biased beliefs fit to survive? An experimental test of the market selection hypothesis," Journal of Economic Theory, Elsevier, vol. 176(C), pages 342-371.

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