Information and ambiguity: herd and contrarian behaviour in financial markets
Theory and Decision
The paper studies the impact of informational ambiguity on behalf of informed traders on history-dependent price behaviour in a model of sequential trading in nancial markets. Following Chateauneuf, Eichberger and Grant (2006), we use neo-additive capacities to model ambiguity. Such ambiguity and attitudes to it can engender herd and contrarian behaviour, and also cause the market to break down. The latter, herd and contrarian behaviour, can be reduced by the existence of a bid-ask spread.
Research in part funded by ESRC grant RES-000-22-0650.
“The final publication is available at Springer via http://dx.doi.org/10.1007/s11238-012-9334-3”
July 2013, Volume 75, Issue 1, pp 1-15