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Asymmetric Information and Survival in Financial Markets

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  • Sciubba, E.

Abstract

In the evolutionary setting for a financial market developed by Blume and Easley (1992) the author considers an infinitely repeated version of a model B la Grossman and Stiglitz (1980) with asymmetrically informed traders. Informed traders observe the realisation of a payoff relevant signal before making their portfolio decisions. Uninformed traders do not have direct access to this kind of information, but can partially infer it from market prices. As a counterpart to their privileged information, informed traders pay a per period cost. As a result, information acquisition triggers a trade-off in this setting. It is proved that, so long as information is costly, a strictly positive measure of uninformed traders will survive. This result contributes to the literature on noise trading. It suggests that Friedman's (1953) argument is too simplistic. Traders whose beliefs are wrong' according to the best available information, in fact, are not wiped out by market forces and do affect asset prices in the long run.

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Bibliographic Info

Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 9908.

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Date of creation: Jun 1999
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Handle: RePEc:cam:camdae:9908

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Web page: http://www.econ.cam.ac.uk/index.htm

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Keywords: Evolution; Portfolio rules; Partially revealing REE; Noise trading;

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  1. 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.
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  4. Sciubba, E., 1999. "The Evolution of Portfolio Rules and the Capital Asset Pricing Model," Cambridge Working Papers in Economics 9909, Faculty of Economics, University of Cambridge.
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Citations

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Cited by:
  1. Luo, Guo Ying, 2012. "Conservative traders, natural selection and market efficiency," Journal of Economic Theory, Elsevier, vol. 147(1), pages 310-335.
  2. David Goldbaum, 2003. "Profitable technical trading rules as a source of price instability," Quantitative Finance, Taylor & Francis Journals, vol. 3(3), pages 220-229.
  3. Mariano Croce & Riccardo Colacito, 2009. "Risk sensitive allocations with multiple goods in international finance. Existence, survivorship, and dynamics," 2009 Meeting Papers 1201, Society for Economic Dynamics.
  4. 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.
  5. Tarek Coury & Emanuela Sciubba, 2006. "Belief Heterogeneity and Survival in Incomplete Markets," Birkbeck Working Papers in Economics and Finance 0613, Birkbeck, Department of Economics, Mathematics & Statistics.
  6. Rabah Amir & Igor Evstigneev & Klaus Schenk-Hoppé, 2013. "Asset market games of survival: a synthesis of evolutionary and dynamic games," Annals of Finance, Springer, vol. 9(2), pages 121-144, May.
  7. Hongjun Yan, 2008. "Natural Selection in Financial Markets: Does it Work?," Yale School of Management Working Papers amz2648, Yale School of Management, revised 01 May 2008.

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