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Rousseau, Fabrice, Boco, Hervé and Germain, Laurent (2016) When Overconfident Traders Meet Feedback Traders. Working Paper. Department of Economics, Finance and Accounting, Maynooth University. (Unpublished)
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Abstract
We develop a model in which informed overconfident market participants and informed
rational speculators trade against trend-chasers. In this model positive feedback traders
act as Computer Based Trading (CBT) and lead to positive feedback loops. In line with
empirical findings we find a positive relationship between the volatility of prices and the
size of the price reversal. The presence of positive feedback traders leads to a higher
degree of trading activity by both types of informed traders. Overconfidence can lead to
less price volatility and more efficient prices. Moreover, overconfident traders may be
better off than their rational counterparts.
| Item Type: | Monograph (Working Paper) |
|---|---|
| Keywords: | Overconfidence; Positive feedback trading; Bubbles; Excess volatility; Market efficiency; Computer Based Trading; Algorithmic Trading; Maynooth University Department of Economics, Finance and Accounting; Working Paper N270-16; |
| Academic Unit: | Faculty of Social Sciences > Economics, Finance and Accounting |
| Item ID: | 7214 |
| Depositing User: | Fabrice Rousseau |
| Date Deposited: | 08 Aug 2016 14:19 |
| Publisher: | Department of Economics, Finance and Accounting |
| URI: | https://mural.maynoothuniversity.ie/id/eprint/7214 |
| 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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