Concentrated trading and the survival of overconfident traders

DOI10.1007/S10255-019-0849-ZMaRDI QIDQ2300515zbMATH OpenOpenAlexWikidataFDO

Authors Huai-Nian Zhang, Deqing Zhou

Publication date 27 February 2020

Published in Acta Mathematicae Applicatae Sinica. English Series (Search for Journal in Brave)

Full work available at URL https://doi.org/10.1007/s10255-019-0849-z

zbMATH Keywords

concentrated tradingoverconfidencestrategic trading

Mathematics Subject Classification ID

Auctions, bargaining, bidding and selling, and other market models (91B26) Economic growth models (91B62)

Review text

The article is a natural continuation of studies related to the important topics: Continuous auctions and insider trading; insider trading in the market with rational expected price; smooth trading with overconfidence and market power; can overconfidence survive the market test? Based on the two-period framework (see [\textit{A. R. Admati} and \textit{P. Pfleiderer}, ``A theory of intraday patterns: volume and price variability, Rev. Financ. Stud. 1, No. 1, 3--40 (1998; \url{doi:10.1093/rfs/1.1.3})]) the authors present the result that an overconfident trader earns more than the rational one. The overconfident trader's trading is less worried by the market maker than the rational trader's trading, so the marginal liquidity cost set by the market maker is relatively low. In turn, this low liquidity cost attracts the discretionary liquidity trading, which effectively provides more camouflage for the overconfident insider's trading. In this way, the overconfident trader defeats the rational trader by profiting from the higher liquidity trading. The model is discussed precisely in Section 2. Section 3 solves the perfect Bayesian Nash equilibrium and gives the equilibrium analysis. The equilibrium results for the two periods are characterized by the Theorem 1. Finally, the authors gives some examples to illustrate the above results.

Recommendations

• Overconfidence, public disclosure and long-lived information
• Smooth trading with overconfidence and market power
• Overconfidence on public information
• Overconfidence and market efficiency with heterogeneous agents
• Overconfidence in the markets for lemons

Cites work

• Continuous Auctions and Insider Trading
• Overconfidence on public information
• Overconfidence, public disclosure and long-lived information
• Sequential fair Stackelberg equilibria of linear strategies in risk-seeking insider trading
• Smooth trading with overconfidence and market power

Cited in

(8)

• Overconfidence on public information
• Are the least successful traders those most likely to exit the market? A survival analysis contribution to the efficient market debate
• Insider trading with a random deadline under partial observations: maximal principle method
• Smooth trading with overconfidence and market power
• Information protocol equilibrium in n-insider perfect competition with a random deadline
• Study on different risk appetites and market structures insider trading under partially observation
• Overconfidence, public disclosure and long-lived information
• Overconfidence and market efficiency with heterogeneous agents

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