Financial markets where traders neglect the informational content of prices

Eyster, Erik, Rabin, Matthew and Vayanos, Dimitri ORCID: 0000-0002-0944-4914 (2019) Financial markets where traders neglect the informational content of prices. Journal of Finance, 74 (1). pp. 371-399. ISSN 0022-1082

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Abstract

We model a financial market where some traders of a risky asset do not fully appreciate what prices convey about others' private information. Markets comprising solely such “cursed” traders generate more trade than those comprising solely rationals. Because rationals arbitrage away distortions caused by cursed traders, mixed markets can generate even more trade. Per-trader volume in cursed markets increases with market size; volume may instead disappear when traders infer others' information from prices, even when they dismiss it as noisier than their own. Making private information public raises rational and “dismissive” volume, but reduces cursed volume given moderate noninformational trading motives.

Item Type:	Article
Official URL:	https://onlinelibrary.wiley.com/journal/15406261
Additional Information:	© 2018 the American Finance Association
Divisions:	Finance
Subjects:	H Social Sciences > HG Finance
JEL classification:	G - Financial Economics > G0 - General G - Financial Economics > G0 - General > G00 - General
Date Deposited:	16 Apr 2018 10:51
Last Modified:	09 Nov 2024 23:00
URI:	http://eprints.lse.ac.uk/id/eprint/87477

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