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Price Discovery in the Presence of Boundedly Rational Agents
[journal article]
Keiber, Karl Ludwig
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Please use the following Persistent Identifier (PID) to cite this document:http://nbn-resolving.de/urn:nbn:de:0168-ssoar-220976
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| Abstract | In this paper we propose a sequential model of security trading which, compared to existing models, is extended along the notions of Simon (1955), Rubinstein (1998), and Odean (1999) by adding boundedly rational traders. Our results indicate that both momentum and mean-reversion in asset prices can be attributed to the presence of agents who are subject to systematic errors in the process of forecasting the liquidation value of a risky security. The length of the momentum period is inversely related to both the amount of information-based trading in the market and the rate at which asset specific information is learned by boundedly rational agents. Furthermore, the model allows explicitly to establish a link between the component of the bid-ask spread that can be explained by bounded rationality and both momentum and reversal. |
| Classification | National Economy; Economic Statistics, Econometrics, Business Informatics |
| Free Keywords | Interest Rate Modelling; LIBOR Market Models; Derivatives Pricing; American Options |
| Publication Year | 2008 |
| Page/Pages | p. 235-249 |
| Journal | Quantitative Finance, 8 (2008) 3 |
| DOI | http://dx.doi.org/10.1080/14697680601158692 |
| Status | Postprint; reviewed |
| Licence | PEER Licence Agreement (applicable only to documents from PEER project) |
| Document Type | journal article |
