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Irrational Financial Markets

Germain, Laurent and Rousseau, Fabrice and Vanhems, Anne Irrational Financial Markets. (2007) In: Congrès international de l'Association Française de Finance (AFFI 2007), 27 June 2007 - 29 June 2007 (Bordeaux, France). (Unpublished)

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Abstract

We analyze a model where irrational and rational informed traders, exchange a risky asset with competitive market makers. irrational traders misperceive the mean of prior information (optimistic/pessimistic bias), the variance of prior information (better/lower than average effect) and the variance of the noise in their private siganal (overconfidence/underconfidence bias). When market makers are rational we obtain results identical to kyle and wang (1997). However if market makers are irrational, we obtain 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:Conference or Workshop Item (Paper)
Audience (conference):International conference without published proceedings
Uncontrolled Keywords:
Institution:Université de Toulouse > Institut Supérieur de l'Aéronautique et de l'Espace - ISAE-SUPAERO (FRANCE)
Université de Toulouse > Toulouse Business School - TBS (FRANCE)
Other partners > National University of Ireland Maynooth (IRELAND)
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Deposited By: odile huynh
Deposited On:13 Oct 2014 09:37

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