We analyze a model where irrational and rational traders exchange a risky asset with competitive market makers. Irrational traders misperceive the mean of prior information (optimistic/pessimistic bias), the variance of prior information (better/lower than average effect)and the variance of the...

We characterize optimal IPO design in the distinct adverse selection problems: one affecting the IPO stage and one arising in the after-market. Allocating shares to an investor with superior information in the after-market depresses the share's value to less informed investors. However, because...

In this paper, we develop a model in which overconfident market participants and rational speculators trade against trend-chasers. We show that the growth and the burst of a financial bubble stem from positive feedback trading. However, the presence of overconfident traders and the risk aversion...

We analyze the result of allowing risk averse traders to split their orders among markets when market makers are assumed to be risk averse.We prove that linear symmetric equilibria exist in that setting. We find that market makers' aggregate expected utility of profit may increase with the...