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Dynamic Trading When You May Be Wrong

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  • Remorov, Alexander

Abstract

I analyze a model with heterogeneous investors who have incorrect beliefs about fundamentals. Investors think that they are right at first, but over time realize that they are wrong. The speed of the realization depends on investor confidence in own beliefs and arrival of new information. The model provides a tractable and clear link for how changing opinions translate into equilibrium dynamics for price, holdings, and expected profits. I am able to generate a wide range of realistic market behaviors, including momentum and reversals, as well as support and resistance levels in prices due to investors being reluctant to admit they are wrong.

Suggested Citation

  • Remorov, Alexander, 2015. "Dynamic Trading When You May Be Wrong," MPRA Paper 63964, University Library of Munich, Germany, revised 27 Apr 2015.
    • Handle: RePEc:pra:mprapa:63964
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    File URL: https://mpra.ub.uni-muenchen.de/63964/1/MPRA_paper_63964.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Asset Pricing; Learning; Being Wrong; Heterogeneous Beliefs; Behavioral Finance;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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