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Information efficiency and financial stability

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  • Caccioli, Fabio
  • Marsili, Matteo
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    Abstract

    The authors study a simple model of an asset market with informed and non-informed agents. In the absence of non-informed agents, the market becomes information efficient when the number of traders with different private information is large enough. Upon introducing non-informed agents, the authors find that the latter contribute significantly to the trading activity if and only if the market is (nearly) information efficient. This suggests that information efficiency might be a necessary condition for bubble phenomena-induced by the behavior of non-informed traders-or conversely that throwing some sands in the gears of financial markets may curb the occurrence of bubbles. --

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    File URL: http://dx.doi.org/10.5018/economics-ejournal.ja.2010-20
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    File URL: http://econstor.eu/bitstream/10419/36706/1/631216685.pdf
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    Bibliographic Info

    Article provided by Kiel Institute for the World Economy in its journal Economics: The Open-Access, Open-Assessment E-Journal.

    Volume (Year): 4 (2010)
    Issue (Month): 20 ()
    Pages: 1-20

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    Handle: RePEc:zbw:ifweej:201020

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    Related research

    Keywords: Interacting agents models; market efficiency; market stability; statistical mechanics of financial markets;

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    References

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    1. Shapley, Lloyd S & Shubik, Martin, 1977. "Trade Using One Commodity as a Means of Payment," Journal of Political Economy, University of Chicago Press, vol. 85(5), pages 937-68, October.
    2. Hart, Oliver D., 1975. "On the optimality of equilibrium when the market structure is incomplete," Journal of Economic Theory, Elsevier, vol. 11(3), pages 418-443, December.
    3. Grossman, Sanford J & Stiglitz, Joseph E, 1980. "On the Impossibility of Informationally Efficient Markets," American Economic Review, American Economic Association, vol. 70(3), pages 393-408, June.
    4. J. Berg & M. Marsili & A. Rustichini & R. Zecchina, 2001. "Statistical mechanics of asset markets with private information," Quantitative Finance, Taylor & Francis Journals, vol. 1(2), pages 203-211.
    5. Hellwig, Martin F., 1980. "On the aggregation of information in competitive markets," Journal of Economic Theory, Elsevier, vol. 22(3), pages 477-498, June.
    6. 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.
    7. F. Caccioli & M. Marsili & P. Vivo, 2009. "Eroding market stability by proliferation of financial instruments," The European Physical Journal B - Condensed Matter and Complex Systems, Springer, vol. 71(4), pages 467-479, October.
    8. Fabio Caccioli & Matteo Marsili & Pierpaolo Vivo, 2009. "Eroding market stability by proliferation of financial instruments," Papers 0910.0064, arXiv.org.
    9. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
    10. David Cass & Alessandro Citanna, 1998. "Pareto improving financial innovation in incomplete markets," Economic Theory, Springer, vol. 11(3), pages 467-494.
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