Advanced Search
MyIDEAS: Login

Second-order Price Dynamics: Approach to Equilibrium with Perpetual Arbitrage

Contents:

Author Info

  • Eric Kemp-Benedict

Abstract

The notion that economies should normally be in equilibrium is by now well-established; equally well-established is that economies are almost never precisely in equilibrium. Using a very general formulation, we show that under dynamics that are second-order in time a price system can remain away from equilibrium with permanent and repeating opportunities for arbitrage, even when a damping term drives the system towards equilibrium. We also argue that second-order dynamic equations emerge naturally when there are heterogeneous economic actors, some behaving as active and knowledgeable arbitrageurs, and others using heuristics. The essential mechanism is that active arbitrageurs are able to repeatedly benefit from the suboptimal heuristics that govern most economic behavior.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://arxiv.org/pdf/1202.5926
File Function: Latest version
Download Restriction: no

Bibliographic Info

Paper provided by arXiv.org in its series Papers with number 1202.5926.

as in new window
Length:
Date of creation: Feb 2012
Date of revision:
Handle: RePEc:arx:papers:1202.5926

Contact details of provider:
Web page: http://arxiv.org/

Related research

Keywords:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Kaldor, Nicholas, 1972. "The Irrelevance of Equilibrium Economics," Economic Journal, Royal Economic Society, vol. 82(328), pages 1237-55, December.
  2. Victor Ginsburgh & Michiel Keyzer, 2002. "The structure of applied general equilibrium models," ULB Institutional Repository 2013/3313, ULB -- Universite Libre de Bruxelles.
  3. Herbert E. Scarf, 1959. "Some Examples of Global Instability of the Competitive Equilibrium," Cowles Foundation Discussion Papers 79, Cowles Foundation for Research in Economics, Yale University.
  4. Xavier Gabaix & Parameswaran Gopikrishnan & Vasiliki Plerou & H. Eugene Stanley, 2006. "Institutional Investors and Stock Market Volatility," The Quarterly Journal of Economics, MIT Press, vol. 121(2), pages 461-504, May.
  5. Eric Kemp-Benedict, 2011. "Second-Order, Dissipative T\^atonnement: Economic Interpretation and 2-Point Limit Cycles," Papers 1108.0188, arXiv.org, revised Aug 2011.
  6. Alan S. Blinder, 1994. "On Sticky Prices: Academic Theories Meet the Real World," NBER Chapters, in: Monetary Policy, pages 117-154 National Bureau of Economic Research, Inc.
  7. Frank Ackerman, 2001. "Still dead after all these years: interpreting the failure of general equilibrium theory," Journal of Economic Methodology, Taylor & Francis Journals, vol. 9(2), pages 119-139.
  8. Mantel, Rolf R., 1974. "On the characterization of aggregate excess demand," Journal of Economic Theory, Elsevier, vol. 7(3), pages 348-353, March.
  9. Jean-Philippe Bouchaud & J. Doyne Farmer & Fabrizio Lillo, 2008. "How markets slowly digest changes in supply and demand," Papers 0809.0822, arXiv.org.
  10. Debreu, Gerard, 1974. "Excess demand functions," Journal of Mathematical Economics, Elsevier, vol. 1(1), pages 15-21, March.
  11. Fisher,Franklin M., 1989. "Disequilibrium Foundations of Equilibrium Economics," Cambridge Books, Cambridge University Press, number 9780521378567, November.
  12. Saari, Donald G, 1985. "Iterative Price Mechanisms," Econometrica, Econometric Society, vol. 53(5), pages 1117-31, September.
  13. Markus K Brunnermeier, 2002. "Bubbles and Crashes," FMG Discussion Papers dp401, Financial Markets Group.
  14. Gabaix, Xavier & Gopikrishnan, Parameswaran & Plerou, Vasiliki & Stanley, Eugene, 2007. "A unified econophysics explanation for the power-law exponents of stock market activity," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 382(1), pages 81-88.
  15. Jordan, J. S., 1986. "Instability in the implementation of Walrasian allocations," Journal of Economic Theory, Elsevier, vol. 39(2), pages 301-328, August.
  16. Sonnenschein, Hugo, 1972. "Market Excess Demand Functions," Econometrica, Econometric Society, vol. 40(3), pages 549-63, May.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Eric Kemp-Benedict, 2012. "Price and Quantity Trajectories: Second-order Dynamics," Papers 1204.3156, arXiv.org.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:arx:papers:1202.5926. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (arXiv administrators).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.