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On information efficiency and financial stability

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  • Fabio Caccioli
  • Matteo Marsili
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    Abstract

    We 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, we 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://arxiv.org/pdf/1004.5014
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    Bibliographic Info

    Paper provided by arXiv.org in its series Papers with number 1004.5014.

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    Date of creation: Apr 2010
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    Handle: RePEc:arx:papers:1004.5014

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    Web page: http://arxiv.org/

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