Speculating against an overconfident market

Jordi Caballé; József Sákovics

doi:10.1016/S1386-4181(01)00030-1

Speculating against an overconfident market

Jordi Caballé, József Sákovics

Research output: Contribution to journal › Article › Research › peer-review

31 Citations (Scopus)

Abstract

We distinguish two components of self-confidence in a financial market: private self confidence measures the self-confidence of speculators, while public self-confidence measures the self-confidence they attribute to their competitors. We study how independent changes in these components affect the trading strategies. We calculate the unique linear symmetric equilibrium and the major indicators of market performance in a financial market with imperfect competition where investors submit limit orders. In addition to providing a partial explanation for the excess volatility of asset prices and for trading volume unexplained by the arrival of new information, our model highlights the differences between the effects of biases in public versus private self-confidence. © 2002 Elsevier Science B.V. All rights reserved.

Original language	English
Pages (from-to)	199-225
Journal	Journal of Financial Markets
Volume	6
DOIs	https://doi.org/10.1016/S1386-4181(01)00030-1
Publication status	Published - 1 Jan 2003

Keywords

Financial markets
Imperfect competition
Overconfidence

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10.1016/S1386-4181(01)00030-1

1 Finished

La Política Monetaria en la Unión Europea
Caballé, J. (Principal Investigator), Erosa Etchebehere, A. (Researcher on contract), Rodriguez Mendizábal, H. (Researcher on contract), Jarque Ribera, X. (Investigator), Panadès Martí, J. (Investigator), Petith , H. C. (Investigator) & Sorolla Amat, V. (Investigator)
Ministerio de Ciencia y Tecnología (MCYT)
29/12/00 → 29/12/03
Project: Research Projects and Other Grants

Cite this

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title = "Speculating against an overconfident market",

abstract = "We distinguish two components of self-confidence in a financial market: private self confidence measures the self-confidence of speculators, while public self-confidence measures the self-confidence they attribute to their competitors. We study how independent changes in these components affect the trading strategies. We calculate the unique linear symmetric equilibrium and the major indicators of market performance in a financial market with imperfect competition where investors submit limit orders. In addition to providing a partial explanation for the excess volatility of asset prices and for trading volume unexplained by the arrival of new information, our model highlights the differences between the effects of biases in public versus private self-confidence. {\textcopyright} 2002 Elsevier Science B.V. All rights reserved.",

keywords = "Financial markets, Imperfect competition, Overconfidence",

author = "Jordi Caball{\'e} and J{\'o}zsef S{\'a}kovics",

note = "This is a revised version of our paper previously circulated as “Overconfident Speculation with Imperfect Competition.” We thank Gerard Gennotte, Ric Holt, Francis Kramarz, Murugappa Krishnan, Kai-Uwe K{\"u}hn, Jordi Mass{\'o}, Joao A. Matos, Laura Mayoral, Judith Panad{\'e}s, Elu von Thadden, Xavier Vives, the participants of the BBV Financial Economics Seminar at Bellaterra, the Fourgeaud Seminar at Paris, and the CEPR Workshop on Market Microstructure at Barcelona, an anonymous referee, and the Co-editor of this Journal for their useful suggestions. We acknowledge financial support from the Fundaci{\'o}n BBV, the Spanish Ministry of Science and Technology (SEC2000-0684) and the Generalitat of Catalonia (SGR2000-54). We appreciate the able assistance provided by M. Jos{\'e} Garcı́a.",

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doi = "10.1016/S1386-4181(01)00030-1",

language = "English",

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AU - Caballé, Jordi

AU - Sákovics, József

N1 - This is a revised version of our paper previously circulated as “Overconfident Speculation with Imperfect Competition.” We thank Gerard Gennotte, Ric Holt, Francis Kramarz, Murugappa Krishnan, Kai-Uwe Kühn, Jordi Massó, Joao A. Matos, Laura Mayoral, Judith Panadés, Elu von Thadden, Xavier Vives, the participants of the BBV Financial Economics Seminar at Bellaterra, the Fourgeaud Seminar at Paris, and the CEPR Workshop on Market Microstructure at Barcelona, an anonymous referee, and the Co-editor of this Journal for their useful suggestions. We acknowledge financial support from the Fundación BBV, the Spanish Ministry of Science and Technology (SEC2000-0684) and the Generalitat of Catalonia (SGR2000-54). We appreciate the able assistance provided by M. José Garcı́a.

PY - 2003/1/1

Y1 - 2003/1/1

N2 - We distinguish two components of self-confidence in a financial market: private self confidence measures the self-confidence of speculators, while public self-confidence measures the self-confidence they attribute to their competitors. We study how independent changes in these components affect the trading strategies. We calculate the unique linear symmetric equilibrium and the major indicators of market performance in a financial market with imperfect competition where investors submit limit orders. In addition to providing a partial explanation for the excess volatility of asset prices and for trading volume unexplained by the arrival of new information, our model highlights the differences between the effects of biases in public versus private self-confidence. © 2002 Elsevier Science B.V. All rights reserved.

AB - We distinguish two components of self-confidence in a financial market: private self confidence measures the self-confidence of speculators, while public self-confidence measures the self-confidence they attribute to their competitors. We study how independent changes in these components affect the trading strategies. We calculate the unique linear symmetric equilibrium and the major indicators of market performance in a financial market with imperfect competition where investors submit limit orders. In addition to providing a partial explanation for the excess volatility of asset prices and for trading volume unexplained by the arrival of new information, our model highlights the differences between the effects of biases in public versus private self-confidence. © 2002 Elsevier Science B.V. All rights reserved.

KW - Financial markets

KW - Imperfect competition

KW - Overconfidence

U2 - 10.1016/S1386-4181(01)00030-1

DO - 10.1016/S1386-4181(01)00030-1

M3 - Article

SN - 1386-4181

VL - 6

SP - 199

EP - 225

JO - Journal of Financial Markets

JF - Journal of Financial Markets

ER -

Speculating against an overconfident market

Abstract

Keywords

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La Política Monetaria en la Unión Europea

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