Abstract
I study trading on public information when investor beliefs are heterogeneous in both optimism and confidence. Two sources of heterogeneous confidence, private information and overconfidence, are jointly considered. Heterogeneous confidence can generate trading in the absence of noise trading and private information. The model predicts that more confident traders are contrarians while less confident traders are momentum chasers due to different information sensitivity. Interestingly, the model synthesizes existing evidence on momentum and contrarian trading of inside, individual, institutional, and foreign investors surprisingly well. Testable hypotheses are discussed.
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