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Rational Trend Followers and Contrarians in Excessively Volatile, Correlated Markets

SSRN Electronic Journal
2007
  • 1
    Citations
  • 9,929
    Usage
  • 11
    Captures
  • 0
    Mentions
  • 0
    Social Media
Metric Options:   Counts1 Year3 Year

Metrics Details

  • Citations
    1
    • Citation Indexes
      1
  • Usage
    9,929
    • Abstract Views
      8,774
    • Downloads
      1,155
  • Captures
    11
  • Ratings
    • Download Rank
      37,269

Article Description

This paper studies an overlapping generations model with multiple securities and heterogeneously informed agents. The model produces multiple equilibria, including highly volatile equilibria that can exhibit strong or weak correlations between asset returns - even when asset supplies and future dividends are uncorrelated across assets. Less informed agents rationally behave like trend-followers, while better informed agents follow contrarian strategies. Trading volume has a hump-shaped relation with information precision and is positively correlated with absolute price changes. Finally, accurate information increases the volatility and correlation of stock returns in the highly volatile, strongly correlated equilibrium.

Bibliographic Details

Masahiro Watanabe

Elsevier BV

overlapping generations; noisy rational expectations equilibrium; excessive volatility; comovement; trend-following behavior; contrarians

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