Rebels, Conformists, Contrarians and Momentum Traders

45 Pages Posted: 7 Apr 2000

See all articles by Evan Gatev

Evan Gatev

Simon Fraser University

Stephen A. Ross

Massachusetts Institute of Technology (MIT) - Sloan School of Management; Yale University - International Center for Finance

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Date Written: December 14, 2002

Abstract

We consider investing in a noisy market with incorrect beliefs about predictability. Two types of agents use subjective models to optimize their portfolios - "conformists" who happen to believe in the self-fulfilling market consensus and "rebels" who have wrong beliefs. We compare the agents' dynamic trading and their empirically observable investment performance. An agent who believes in log-normality is always a contrarian trader, who buys more shares after the price goes down, and sells shares when the price goes up. In contrast, an agent who believes in price predictability acts as a momentum trader, who buys more shares after the price goes up, for a range of subjective market mis-pricings. We show that more incorrect beliefs about predictability can lead to higher expected returns. Moreover, rebels with incorrect beliefs can have higher expected return than conformists with the same risk-aversion. We find that it is more dangerous to be a sophisticated rebel in a non-predictable world, than to be a simplistic rebel in a predictable world.

JEL Classification: G11

Suggested Citation

Gatev, Evan and Ross, Stephen A., Rebels, Conformists, Contrarians and Momentum Traders (December 14, 2002). Available at SSRN: https://ssrn.com/abstract=215952 or http://dx.doi.org/10.2139/ssrn.215952

Evan Gatev (Contact Author)

Simon Fraser University ( email )

Burnaby, British Columbia V5A 1S6
Canada

Stephen A. Ross

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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E62-416
Cambridge, MA 02142
United States
203-432-6015 (Phone)
203-432-8931 (Fax)

Yale University - International Center for Finance

Box 208200
New Haven, CT 06520-8200
United States

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