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Rebels, Conformists, Contrarians And Momentum Traders

Listed author(s):
  • Evan Gatev
  • Stephen Ross

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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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
Contact details of provider: Web page: http://icf.som.yale.edu/

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