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The market organism: Long-run survival in markets with heterogeneous traders

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  • Blume, Lawrence
  • Easley, David

Abstract

The information content of prices is a central problem in the general equilibrium analysis of competitive markets. Rational expectations equilibrium identifies conditioning simultaneously on contemporaneous prices and private information as the mechanism by which information enters prices. Here we look to the ecology of markets for an explanation of the information content of prices. Markets could select across traders with different beliefs, or, reminiscent of 'the wisdom of crowds', markets could balance the diverse information of many participants. We provide theoretical support in favor of the first mechanism, and against the second. Along the way we demonstrate that the necessary condition for long-run survival in complete markets found in Sandroni [2000. Do markets favor agents able to make accurate predictions? Econometrica 68 (6), 1303-1342] and in Blume and Easley [2006. If you're so smart, why aren't you rich? Belief selection in complete and incomplete markets. Econometrica 74 (4), 929-966] is not sufficient for long-run survival. We also demonstrate some surprising behavior of market prices when several trader types with different beliefs survive. This paper continues the research program of Blume and Easley [1992. Evolution and market behavior. Journal of Eonomic theory 58 (1), 9-40] and Beker and Chattopadhyay [2006. Consumption dynamics in general equilibrium: a characterisation when markets are incomplete, University of Warwick, unpublished].

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Bibliographic Info

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

Volume (Year): 33 (2009)
Issue (Month): 5 (May)
Pages: 1023-1035

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Handle: RePEc:eee:dyncon:v:33:y:2009:i:5:p:1023-1035

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

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Keywords: General equilibrium Market selection hypothesis;

References

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  1. George J. Mailath & Alvaro Sroni, . "Market Selection and Asymmetric Information," Penn CARESS Working Papers d50f0ddbbf9f79b6e05bb90a5, Penn Economics Department.
  2. Snyder, Wayne W, 1978. "Horse Racing: Testing the Efficient Markets Model," Journal of Finance, American Finance Association, vol. 33(4), pages 1109-18, September.
  3. Alvaro Sandroni, 2000. "Do Markets Favor Agents Able to Make Accurate Predicitions?," Econometrica, Econometric Society, Econometric Society, vol. 68(6), pages 1303-1342, November.
  4. Blume, Lawrence & Easley, David, 1992. "Evolution and market behavior," Journal of Economic Theory, Elsevier, vol. 58(1), pages 9-40, October.
  5. Peleg, Bezalel & Yaari, Menahem E, 1970. "Markets with Countably Many Commodities," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 11(3), pages 369-77, October.
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Cited by:
  1. Mikhail Anufriev & Pietro Dindo, 2007. "Wealth-driven Selection in a Financial Market with Heterogeneous Agents," LEM Papers Series 2007/27, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
  2. Elyès Jouini & Clotilde Napp, 2010. "Unbiased Disagreement in Financial Markets, Waves of Pessimism and the Risk-Return Trade-off," Review of Finance, European Finance Association, European Finance Association, vol. 15(3), pages 575-601.
  3. Beker, Pablo F. & Espino, Emilio, 2011. "The dynamics of efficient asset trading with heterogeneous beliefs," Journal of Economic Theory, Elsevier, vol. 146(1), pages 189-229, January.

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