Abstract

http://ssrn.com/abstract=557085
 
 

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Overconfidence and Market Efficiency with Heterogeneous Agents


Diego Garcia


University of North Carolina at Chapel Hill - Finance Area

Francesco Sangiorgi


Swedish House of Finance

Branko Urosevic


Universitat Pompeu Fabra - Faculty of Economic and Business Sciences

September 1, 2005

Economic Theory, Vol. 30, No. 2, 2007

Abstract:     
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 (endogenously) decides to become informed in equilibrium, prices are set as if all investors were rational, and as a consequence the overconfidence bias does not affect informational efficiency, price volatility, rational 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 overconfident. The main intuition of the paper, if not the irrelevance result, is shown to be robust to different model specifications.

Number of Pages in PDF File: 28

Keywords: partially revealing equilibria, overconfidence, rational expectations, information

JEL Classification: D80, G10

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Date posted: June 23, 2004 ; Last revised: September 18, 2012

Suggested Citation

Garcia, Diego and Sangiorgi, Francesco and Urosevic, Branko, Overconfidence and Market Efficiency with Heterogeneous Agents (September 1, 2005). Economic Theory, Vol. 30, No. 2, 2007. Available at SSRN: http://ssrn.com/abstract=557085

Contact Information

Diego Garcia
University of North Carolina at Chapel Hill - Finance Area ( email )
Chapel Hill, NC 27599-3490
1-919-962-8404 (Phone)
HOME PAGE: http://www.unc.edu/~garciadi/

Francesco Sangiorgi
Swedish House of Finance ( email )
Drottninggatan 98
111 60 Stockholm
Sweden

Branko Urosevic (Contact Author)
Universitat Pompeu Fabra - Faculty of Economic and Business Sciences ( email )
Ramon Trias Fargas 25-27
Barcelona, 08005
Spain
34-93-542-2590 (Phone)
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