English, Article, Journal or magazine article edition: Overconfidence and Market Efficiency with Heterogeneous Agents Diego Garcia; Francesco Sangiorgi; Branko Urosevic

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Bookmark: http://trove.nla.gov.au/version/153153
Physical Description
  • preprint
Language
  • English

Edition details

Title
  • Overconfidence and Market Efficiency with Heterogeneous Agents
Author
  • Diego Garcia
  • Francesco Sangiorgi
  • Branko Urosevic
Physical Description
  • preprint
Notes
  • We study financial markets in which both rational and overconfident agents coexist and make endogenous information acquisition decisions. We demonstrate the following irrelevance result: when a positive fraction of rational agents (endogeneously) decides to become informed in equilibrium, prices are set as if all investors were rational, and as a consequence the overconfidence bias does not aect informational efficiency, price volatility, rational traders’ expected profits or their welfare. Intuitively, as overconfidence goes up, so does price infornativeness, which makes rational agents cut their information acquisition activities, effectively undoing the standard effect of more aggressive trading by the overconfident.
  • RePEc:upf:upfgen:786
  • We study financial markets in which both rational and overconfident agents coexist and make endogenous information acquisition decisions. We demonstrate the following irrele- vance result: when a positive fraction of rational agents (endogenously) decides to become informed in equilibrium, prices are set as if all investors were rational, and as a conse- quence the overconfidence bias does not affect informational efficiency, price volatility, ra- tional traders expected profits or their welfare. Intuitively, as overconfidence goes up, so does price informativeness, which makes rational agents cut their information acquisition activities, effectively undoing the standard effect of more aggressive trading by the overcon- fident. The main intuition of the paper, if not the irrelevance result, is shown to be robust to different model specifications.
  • partially revealing equilibria, overconfidence, rational expectations, information acquisition, price informativeness.
  • RePEc:cca:wpaper:11
Language
  • English
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