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Market efficiency and learning in an endogenously unstable environment

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  • Goldbaum, David

Abstract

A least-squares model governs the learning process as traders attempt to extract private information from the market price of an asset. Replicator dynamics govern the evolution of the popularity of this strategy against the alternative, directly acquiring the private information through research. The lack of a fixed point to the dual dynamics embodies the Grossman and Stiglitz (1980) impossibility of informationally efficient markets. The asymptotic behavior of the system has the model switching between price stability and instability, endogenously generating noise in the price. The asymptotic behavior is the same when all traders access and employ both fundamental and market information.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 29 (2005)
Issue (Month): 5 (May)
Pages: 953-978

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Handle: RePEc:eee:dyncon:v:29:y:2005:i:5:p:953-978

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Web page: http://www.elsevier.com/locate/jedc

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Citations

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Cited by:
  1. Hommes, Cars, 2011. "The heterogeneous expectations hypothesis: Some evidence from the lab," Journal of Economic Dynamics and Control, Elsevier, vol. 35(1), pages 1-24, January.
  2. William Brock & Cars Hommes & Florian Wagener, 2006. "More Hedging Instruments may destablize Markets," Tinbergen Institute Discussion Papers 06-080/1, Tinbergen Institute, revised 30 Apr 2008.
  3. Hommes, C.H. & Wagener, F.O.O., 2008. "Complex evolutionary systems in behavioral finance," CeNDEF Working Papers 08-05, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
  4. Diks, C.G.H. & Dindo, P.D.E., 2006. "Informational differences and learning in an asset market with boundedly rational agents," CeNDEF Working Papers 06-11, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
  5. Cars H. Hommes, 2005. "Heterogeneous Agent Models in Economics and Finance," Tinbergen Institute Discussion Papers 05-056/1, Tinbergen Institute.
  6. David Goldbaum, 2003. "Profitable technical trading rules as a source of price instability," Quantitative Finance, Taylor & Francis Journals, vol. 3(3), pages 220-229.
  7. Goldbaum, David & Panchenko, Valentyn, 2010. "Learning and adaptation's impact on market efficiency," Journal of Economic Behavior & Organization, Elsevier, vol. 76(3), pages 635-653, December.
  8. David Goldbaum, 2004. "On the Possibility of Informationally Efficient Markets," Computing in Economics and Finance 2004 139, Society for Computational Economics.
  9. Goldbaum, David, 2006. "Self-organization and the persistence of noise in financial markets," Journal of Economic Dynamics and Control, Elsevier, vol. 30(9-10), pages 1837-1855.
  10. David Goldbaum, 2013. "Learning and Adaptation as a Source of Market Failure," Working Paper Series 14, Economics Discipline Group, UTS Business School, University of Technology, Sydney.
  11. Cars H. Hommes, 2005. "Heterogeneous Agent Models in Economics and Finance," Tinbergen Institute Discussion Papers 05-056/1, Tinbergen Institute.

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