eprintid: 15284
rev_number: 23
eprint_status: archive
userid: 1482
importid: 105
dir: disk0/00/01/52/84
datestamp: 2014-07-09 17:25:51
lastmod: 2021-04-02 15:47:38
status_changed: 2017-03-17 15:39:17
type: monograph
metadata_visibility: no_search
creators_name: Pouget, Sébastien
creators_name: Villeneuve, Stéphane
creators_idrefppn: 151861285
creators_idrefppn: 061507105
title: A Mind is a Terrible Thing to Change: Confirmation Bias in Financial Markets
ispublished: pub
subjects: subjects_ECO
abstract: 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.
date: 2012-03
date_type: published
publisher: TSE Working Paper
official_url: http://tse-fr.eu/pub/25824
faculty: tse
divisions: tse
keywords: financial markets
keywords: psychological biases
keywords: confirmation bias
keywords: momentum
keywords: reversal
keywords: bubbles
keywords: trading strategies
language: en
has_fulltext: TRUE
view_date_year: 2012
full_text_status: public
monograph_type: working_paper
series: TSE Working Paper
volume: 12-306
place_of_pub: Toulouse
pages: 133
institution: Université Toulouse 1 Capitole
department: Toulouse School of Economics
book_title: TSE Working Paper
oai_identifier: oai:tse-fr.eu:25824
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harvester_local_overwrite: faculty
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harvester_local_overwrite: institution
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oai_lastmod: 2017-03-07T07:58:54Z
oai_set: tse
site: ut1
citation:   Pouget, Sébastien <https://www.idref.fr/151861285> and Villeneuve, Stéphane <https://www.idref.fr/061507105>  (2012) A Mind is a Terrible Thing to Change: Confirmation Bias in Financial Markets.  TSE Working Paper, n. 12-306, Toulouse     
document_url: https://publications.ut-capitole.fr/id/eprint/15284/1/Pouget_15284.pdf