Rational Trend Followers and Contrarians in Excessively Volatile, Correlated Markets

摘要: This paper studies an overlapping generations model with multiple securities and heterogeeously informed agents. There are two types of multiplicity equilibria, one due to noisy rational expectations the other resulting from self-fulfilling prophecies. Under general conditions, there exists equilibrium in which stock returns highly volatile strongly correlated, even if all underlying shocks small independent. Other equilibria include a volatile, weakly correlated one. When prices partially revealing, less agents rationally behave like trend-followers, while better follow contrarian strategies. Trade volume has inverted-U relation information precision, is positively absolute price changes. Accurate generally weakens agents' trend-following behavior, it strengthens properties equilibrium. Unlike existing models, fully revealing well defined provides useful link traditional literature.