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Rousseau, Fabrice, Germain, Laurent and Vanhems, Anne (2013) Irrational Market Makers. Working Paper. Department of Economics, Finance & Accounting, Maynooth University. (Unpublished)
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Abstract
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 |
| URI: | https://mural.maynoothuniversity.ie/id/eprint/6227 |
| 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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