Price Discovery in the Presence of Boundedly Rational Agents

Abstract: In this paper we propose a sequential model of security trading which, compared to existing models, is extended along the notions of Simon (1955), Rubinstein (1998), and Odean (1999) by adding boundedly rational traders. Our results indicate that both momentum and mean-reversion in asset prices can be attributed to the presence of agents who are subject to systematic errors in the process of forecasting the liquidation value of a risky security. The length of the momentum period is inversely related to both the amount of information-based trading in the market and the rate at which asset specific information is learned by boundedly rational agents. Furthermore, the model allows explicitly to establish a link between the component of the bid-ask spread that can be explained by bounded rationality and both momentum and reversal

Object Details

• Location: Deutsche Nationalbibliothek Frankfurt am Main
• Extent: Online-Ressource
• Language: Englisch
• Notes: Postprint ; begutachtet (peer reviewed) ; In: Quantitative Finance ; 8 (2008) 3 ; 235-249

Classification and Topics

• Classification: Wirtschaft

Contributors, Places and Time

• Event: Veröffentlichung
• (where): Mannheim
• (when): 2008
• Creator: Keiber, Karl Ludwig

Further information

• DOI: 10.1080/14697680601158692
• URN: urn:nbn:de:0168-ssoar-220976
• Rights: Open Access unbekannt; Open Access; Der Zugriff auf das Objekt ist unbeschränkt möglich.
• Last update: 15.08.2025, 7:34 AM CEST