Financial markets where traders neglect the informational content of prices

Eyster, Erik, Rabin, Matthew and Vayanos, Dimitri ORCID: 0000-0002-0944-4914 (2017) Financial markets where traders neglect the informational content of prices. Financial Markets Group Discussion Papers (770). Financial Markets Group, The London School of Economics and Political Science, London, UK.

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Abstract

We present a model of a financial market where some traders are "cursed" when investing in a risky asset, failing to fully appreciate what prices convey about others' private information. Markets comprising cursed traders generate more trade than those comprising rationals; mixed markets can generate even more trade because rationals exploit return predictability caused by cursed. Per-trader volume in cursed markets increases with market size; volume may instead disappear when traders infer others' information from prices but dismiss it as noisier than their own. Public-information revelation raises rational and"dismissive" volume, but lowers cursed volume given moderate non-informational trading motives.

Item Type:	Monograph (Discussion Paper)
Official URL:	https://www.fmg.ac.uk/
Additional Information:	© 2017 The Authors
Divisions:	Economics Finance
Subjects:	H Social Sciences > HC Economic History and Conditions H Social Sciences > HG Finance
JEL classification:	G - Financial Economics > G0 - General > G00 - General G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice; Investment Decisions G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information
Date Deposited:	31 May 2023 14:21
Last Modified:	01 Apr 2024 08:00
URI:	http://eprints.lse.ac.uk/id/eprint/118956

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