Does overconfidence always matter for asset prices?

Abstract

Research in behaviour finance has provided seemingly persuasive evidences that overconfidence affects asset prices. We provide a model with model uncertainty and overconfidence in which overconfidence could have no effect on asset prices.

Notes

¹ Bollerslev et al. (1992) shows that the volatility could be well predicted in some sense.

² Some people may argue that since there are some overlappings between the rational investors' φ and the overconfident investors' φ, overconfident investors are not completely differentiated from the rational ones in our setting. Actually this is not an essential assumption, we keep it just for simplifying the following calculations. The key element is the symmetric distribution of φ around a fixed value , that is, we can assume that φ is distributed on the intervals of and .