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Rational investor sentiment in a repeated stochastic game with imperfect monitoring


Gerber, Anke; Hens, Thorsten; Vogt, Bodo (2010). Rational investor sentiment in a repeated stochastic game with imperfect monitoring. Journal of Economic Behavior & Organization, 76(3):669-704.

Abstract

We consider a repeated stochastic coordination game with imperfect public monitoring. In the game any pattern of coordinated play is a perfect Bayesian Nash equilibrium. Moreover, standard equilibrium selection arguments either have no bite or they select an equilibrium that is not observed in actual plays of the game. We give experimental evidence for a unique equilibrium selection and explain this very robust finding by equilibrium selection based on behavioral arguments, in particular focal point analysis, probability matching and overconfidence. Our results have interesting applications in finance because the observed equilibrium exhibits momentum, reversal and excess volatility. Moreover, the results may help to explain why technical analysis is a commonly observed investment style.

Abstract

We consider a repeated stochastic coordination game with imperfect public monitoring. In the game any pattern of coordinated play is a perfect Bayesian Nash equilibrium. Moreover, standard equilibrium selection arguments either have no bite or they select an equilibrium that is not observed in actual plays of the game. We give experimental evidence for a unique equilibrium selection and explain this very robust finding by equilibrium selection based on behavioral arguments, in particular focal point analysis, probability matching and overconfidence. Our results have interesting applications in finance because the observed equilibrium exhibits momentum, reversal and excess volatility. Moreover, the results may help to explain why technical analysis is a commonly observed investment style.

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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Language:English
Date:2010
Deposited On:07 Mar 2011 10:04
Last Modified:05 Apr 2016 14:40
Publisher:Elsevier
ISSN:0167-2681
Publisher DOI:https://doi.org/10.1016/j.jebo.2010.08.001

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