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Financial Markets Where Traders Neglect the Informational Content of Prices
Author(s) -
EYSTER ERIK,
RABIN MATTHEW,
VAYANOS DIMITRI
Publication year - 2019
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/jofi.12729
Subject(s) - arbitrage , rational expectations , private information retrieval , asset (computer security) , economics , volume (thermodynamics) , financial market , financial economics , monetary economics , business , finance , econometrics , statistics , physics , mathematics , computer security , quantum mechanics , computer science
We model a financial market where some traders of a risky asset do not fully appreciate what prices convey about others' private information. Markets comprising solely such “cursed” traders generate more trade than those comprising solely rationals. Because rationals arbitrage away distortions caused by cursed traders, mixed markets can generate even more trade. Per‐trader volume in cursed markets increases with market size; volume may instead disappear when traders infer others' information from prices, even when they dismiss it as noisier than their own. Making private information public raises rational and “dismissive” volume, but reduces cursed volume given moderate noninformational trading motives.