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Ambiguity in Financial Markets: Herding and Contrarian Behaviour

Author

Listed:
  • J L Ford
  • David Kelsey
  • W Pang

Abstract

The paper studies the impact of ambiguity on history-dependant beahviour in the standard microstructure model of financial markets. We show that differences in ambiguity attitudes between market makers and traders can generate contrarian and herding behaviour in stock markets where assets are traded sequentially and trading prices are endogenously determined. We also show the mispricing can be only short-term, and in the long-run market is efficient in the sense that the market price aggregates information without distortions.

Suggested Citation

  • J L Ford & David Kelsey & W Pang, 2005. "Ambiguity in Financial Markets: Herding and Contrarian Behaviour," Discussion Papers 05-11, Department of Economics, University of Birmingham.
    • Handle: RePEc:bir:birmec:05-11
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    File URL: https://repec.cal.bham.ac.uk/pdf/05-11.pdf
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    References listed on IDEAS

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    Cited by:

    1. Pengguang Lu, 2023. "A Simple Model of Herding and Contrarian Behaviour with Biased Informed Traders," Economics Discussion Paper Series 2307, Economics, The University of Manchester, revised Dec 2023.
    2. Craig S. Webb, 2017. "Piecewise linear rank-dependent utility," Theory and Decision, Springer, vol. 82(3), pages 403-414, March.
    3. Craig Webb, 2015. "Piecewise additivity for non-expected utility," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 60(2), pages 371-392, October.

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    Keywords

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    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G1 - Financial Economics - - General Financial Markets

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