Information and ambiguity: herd and contrarian behaviour in financial markets

Abstract

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.

On booms that never bust: Ambiguity in experimental asset markets with bubbles

“…Because traders may change their beliefs upwards as prices rise, we expect asset prices not to exhibit the same type of dramatic crashes in the ambiguity, as in the risk, treatment. This prediction also relates to the models assessing the impact of ambiguity on herding in financial markets (e.g., Dong et al, 2010;Ford et al, 2013). These works stress that the conditions for the formation of bubbles in a herding model à la Avery and Zemsky (1998) are less stringent in the case in which ambiguity in the fundamentals is introduced.…”

“…These models have provided a first attempt at formalizing the observation of prominent scholars such as Keynes (1936) and Shiller (2000) regarding the fact that ambiguous asset market values may favor the emergence of bubbles. For example, Ford et al, (2013) use a herding model à la Avery and Zemsky (1998) to show that, taking into account traders' ambiguity can lead them to downplay their private information and mimic other traders' decisions. Their general finding is that, in the presence of ambiguity, herding in financial markets can occur under a broader set of information conditions than envisioned by Avery and Zemsky (1998).…”

Production and hedging with optimism and pessimism under ambiguity

“…5 The model of Chateauneuf et al (2007) has proven useful in several other applications (e.g., Teitelbaum, 2007;Schroder, 2011;Chakravarty & Kelsey, 2012;Ford, Kelsey, & Pang, 2013). ambiguity, optimism, and pessimism, respectively, and allows us to analyze their effects on the firm's production and hedging decisions in a tractable manner.…”

Option implied ambiguity and its information content: Evidence from the subprime crisis

“…We use Choquet expected utility (CEU) as a general framework to represent ambiguity as model parameter uncertainty generally affects the first and second moments of the distribution of index returns in times of ambiguity (e.g., Gollier 2008;Ford et al 2014). We rely on previous evidence suggesting that several phenomena under ambiguity can be explained under the CEU lens (e.g., Kelsey et al 2011;Nguyen et al 2012).…”