Speculating against an overconfident market

Jordi Caballe () and József Sákovics

Edinburgh School of Economics Discussion Paper Series from Edinburgh School of Economics, University of Edinburgh

Abstract: We distinguish two components of self-confidence in a financial market: private confidence measures the self-confidence level of speculators, while public confidence measures the confidence level they attribute to their competitors. We then study how independent changes in these components affect the equilibrium trading strategies. We conduct the analysis in a financial market with imperfect competition where investors submit limit orders We calculate the unique linear symmetric equilibrium as well as the major indicators of the market. In addition to providing a partial explanation for the excess volatility of asset prices as well as for trading volume unexplained by the arrival of new information, our model highlights the differences between the effects of public versus private confidence.

Keywords: overconfidence; financial markets; imperfect competition (search for similar items in EconPapers)
JEL-codes: D84 G12 G14 (search for similar items in EconPapers)
Pages: 37
Date: 2000-05
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Citations: View citations in EconPapers (5)

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Journal Article: Speculating against an overconfident market (2003)
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Persistent link: https://EconPapers.repec.org/RePEc:edn:esedps:62

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