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The overconfident trader does not always overreact to his information

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  • Du, Sarina
  • Liu, Hong

Abstract

This article develops a strategic trading model in which the outsider is overconfident on the shared information. Our result shows that a more confident outsider underreacts to his information in the sense that he trades less aggressively on his information, leading to a less profit in the trading. However, the insider trades more aggressively on the shared information and less aggressively on the private information when he faces a more overconfident outsider. Also, the overconfidence of the outsider leads to a larger insider's expected profits, an increased expected loss of noise trader, and a less efficient and less stable market.

Suggested Citation

  • Du, Sarina & Liu, Hong, 2015. "The overconfident trader does not always overreact to his information," Economic Modelling, Elsevier, vol. 46(C), pages 384-390.
    • Handle: RePEc:eee:ecmode:v:46:y:2015:i:c:p:384-390
    DOI: 10.1016/j.econmod.2015.02.009
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    References listed on IDEAS

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