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Irrational confidence, imperfect and long-lived information

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  • Zhou, Deqing

Abstract

We analyze a dynamic framework where an informed agent overestimates or underestimates the precision of his noisy private signal. We investigate the effect of the insider's belief on equilibrium results such as the price informativeness, the liquidity cost, the trading strategy and the expected trading volume. Interestingly, we find that irrationality can yield contrarian trading in the sense that the two successive order imbalances are negatively correlated. Thus, irrationality, distinguished from dissimulation and manipulation, may underlie insiders' trading decisions.

Suggested Citation

  • Zhou, Deqing, 2013. "Irrational confidence, imperfect and long-lived information," International Review of Economics & Finance, Elsevier, vol. 27(C), pages 383-405.
    • Handle: RePEc:eee:reveco:v:27:y:2013:i:c:p:383-405
    DOI: 10.1016/j.iref.2012.11.004
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    References listed on IDEAS

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    Cited by:

    1. Liu, Hsiang-Hsi & Chuang, Wen-I & Huang, Jih-Jeng & Chen, Yu-Hao, 2016. "The overconfident trading behavior of individual versus institutional investors," International Review of Economics & Finance, Elsevier, vol. 45(C), pages 518-539.
    2. Zhou, Deqing, 2015. "The virtue of overconfidence when you are not perfectly informed," Economic Modelling, Elsevier, vol. 47(C), pages 105-110.
    3. Liu, Jiapeng & Tao, Qizhi & Hou, Wenxuan & Zhang, Ting, 2016. "Systematic risk, government policy intervention, and dynamic contrarian investments," International Review of Economics & Finance, Elsevier, vol. 43(C), pages 334-343.

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    More about this item

    Keywords

    Informed trading; Information asymmetry; Overconfidence; Contrarian trading;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • 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

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