Adaptive Expectations, Confirmatory Bias, and Informational Efficiency

Economy – Quantitative Finance – Trading and Market Microstructure

Scientific paper

Rate now

  [ 0.00 ] – not rated yet Voters 0   Comments 0

Details

Scientific paper

We study the informational efficiency of a market with a single traded asset. The price initially differs from the fundamental value, about which the agents have noisy private information (which is, on average, correct). A fraction of traders revise their price expectations in each period. The price at which the asset is traded is public information. The agents' expectations have an adaptive component and a social-interactions component with confirmatory bias. We show that, taken separately, each of the deviations from rationality worsen the information efficiency of the market. However, when the two biases are combined, the degree of informational inefficiency of the market (measured as the deviation of the long-run market price from the fundamental value of the asset) can be non-monotonic both in the weight of the adaptive component and in the degree of the confirmatory bias. For some ranges of parameters, two biases tend to mitigate each other's effect, thus increasing the informational efficiency.

No associations

LandOfFree

Say what you really think

Search LandOfFree.com for scientists and scientific papers. Rate them and share your experience with other people.

Rating

Adaptive Expectations, Confirmatory Bias, and Informational Efficiency does not yet have a rating. At this time, there are no reviews or comments for this scientific paper.

If you have personal experience with Adaptive Expectations, Confirmatory Bias, and Informational Efficiency, we encourage you to share that experience with our LandOfFree.com community. Your opinion is very important and Adaptive Expectations, Confirmatory Bias, and Informational Efficiency will most certainly appreciate the feedback.

Rate now

     

Profile ID: LFWR-SCP-O-561448

  Search
All data on this website is collected from public sources. Our data reflects the most accurate information available at the time of publication.