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Price Discovery in the Presence of Boundedly Rational Agents


Keiber, Karl Ludwig


Bitte beziehen Sie sich beim Zitieren dieses Dokumentes immer auf folgenden Persistent Identifier (PID):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.
Klassifikation Volkswirtschaftstheorie; Wirtschaftsstatistik, Ökonometrie, Wirtschaftsinformatik
Freie Schlagwörter Interest Rate Modelling; LIBOR Market Models; Derivatives Pricing; American Options
Publikationsjahr 2008
Seitenangabe S. 235-249
Zeitschriftentitel Quantitative Finance, 8 (2008) 3
DOI http://dx.doi.org/10.1080/14697680601158692
Status Postprint; begutachtet (peer reviewed)
Lizenz PEER Licence Agreement (applicable only to documents from PEER project)