Financial Markets Where Traders Neglect the Informational Content of Prices

74 Pages Posted: 15 Feb 2018

See all articles by Erik Eyster

Erik Eyster

London School of Economics & Political Science (LSE) - Department of Economics

Matthew Rabin

University of California, Berkeley - Department of Economics

Dimitri Vayanos

London School of Economics; Center for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: February 4, 2018

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 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 lowers cursed volume given moderate non-informational trading motives.

Keywords: behavioral finance, asymmetric information, trading volume, cursedness, overconfidence

JEL Classification: G02, G11, G12, D82

Suggested Citation

Eyster, Erik and Rabin, Matthew and Vayanos, Dimitri, Financial Markets Where Traders Neglect the Informational Content of Prices (February 4, 2018). Journal of Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3117986

Erik Eyster

London School of Economics & Political Science (LSE) - Department of Economics ( email )

Houghton Street
London WC2A 2AE
United Kingdom

Matthew Rabin

University of California, Berkeley - Department of Economics ( email )

549 Evans Hall #3880
Berkeley, CA 94720-3880
United States

Dimitri Vayanos (Contact Author)

London School of Economics ( email )

A350
Houghton Street
London WC2A 2AE
United Kingdom
+44 (0)20 7955 6382 (Phone)
+44 (0)20 7955 7420 (Fax)

Center for Economic Policy Research (CEPR)

London
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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