TY  - RPRT
CY  - Toulouse
ID  - publications15284
UR  - http://tse-fr.eu/pub/25824
A1  - Pouget, Sébastien
A1  - Villeneuve, Stéphane
Y1  - 2012/03//
N2  - This paper proposes a dynamic model of financial markets where
some investors are prone to the confirmation bias. Following insights
from the psychological literature, these agents are assumed to amplify
signals that are consistent with their prior views. In a model with
public information only, this assumption provides a rationale for the
volume-based price momentum documented by Lee and Swaminathan
(2000). Our results are also consistent with a variety of other empirically
documented phenomena such as bubbles, crashes, reversals and
excess price volatility and volume. Novel empirical predictions are derived:
i) return continuation should be stronger when biased traders'
beliefs are more extreme, and ii) return continuation should be stronger
after an increase in trading volume. The implications of our model for
short-term quantitative investments are twofold: i) optimal trading
strategies involve riding bubbles, and that ii) contrarian trading can
be optimal in some market circumstances.
PB  - TSE Working Paper
T3  - TSE Working Paper
KW  - financial markets
KW  - psychological biases
KW  - confirmation bias
KW  - momentum
KW  - reversal
KW  - bubbles
KW  - trading strategies
M1  - working_paper
TI  - A Mind is a Terrible Thing to Change: Confirmation Bias in Financial Markets
AV  - public
EP  - 133
ER  -