Munich Personal RePEc Archive

Dynamic Trading When You May Be Wrong

Remorov, Alexander (2015): Dynamic Trading When You May Be Wrong.

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Abstract

I analyze a model with heterogeneous investors who have incorrect beliefs about fundamentals. Investors think that they are right at first, but over time realize that they are wrong. The speed of the realization depends on investor confidence in own beliefs and arrival of new information. The model provides a tractable and clear link for how changing opinions translate into equilibrium dynamics for price, holdings, and expected profits. I am able to generate a wide range of realistic market behaviors, including momentum and reversals, as well as support and resistance levels in prices due to investors being reluctant to admit they are wrong.

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