RT Monograph
SR 00
A1 Pouget, Sébastien
A1 Villeneuve, Stéphane
T1 A Mind is a Terrible Thing to Change: Confirmation Bias in Financial Markets
YR 2012
FD 2012-03
VO 12-306
SP 133
K1 financial markets
K1 psychological biases
K1 confirmation bias
K1 momentum
K1 reversal
K1 bubbles
K1 trading strategies
AB 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.
T2 TSE Working Paper
PB TSE Working Paper
PP Toulouse
AV Published
LK https://publications.ut-capitole.fr/id/eprint/15284/
UL http://tse-fr.eu/pub/25824