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    Irrational Market Makers

    Rousseau, Fabrice and Germain, Laurent and Vanhems, Anne (2013) Irrational Market Makers. Working Paper. Department of Economics, Finance & Accounting, Maynooth University. (Unpublished)

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    We analyze a model where irrational and rational informed traders exchange a risky asset with irrational market makers. Irrational traders misperceive the mean of prior information (optimistic/pessimistic bias) and the variance of the noise in their private signal (overconfidence/underconfidence bias). Irrational market makers misperceive both the mean and the variance of the prior information. We show that moderately underconfident traders can outperform rational ones and that irrational market makers can fare better than rational ones. Lastly, we find that extreme level of confidence implies high trading volume.

    Item Type: Monograph (Working Paper)
    Additional Information: Working Paper N261-13. This working paper is a revised version of the working paper N1870108
    Keywords: Irrational Traders; Irrational Market makers; Overconfidence; Optimism;
    Academic Unit: Faculty of Social Sciences > Economics, Finance and Accounting
    Item ID: 6227
    Depositing User: Ms Sandra Doherty
    Date Deposited: 02 Jul 2015 15:04
    Publisher: Department of Economics, Finance & Accounting, Maynooth University
      Use Licence: This item is available under a Creative Commons Attribution Non Commercial Share Alike Licence (CC BY-NC-SA). Details of this licence are available here

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