In financial markets, an excess of buying tends to drive prices up, and an excess of selling tends to drive them down. This is called market impact. Based on a simplified model for market making, it is possible to derive a unique functional form for market impact. This can be used to formulate a non-equilibrium theory for price formation. Commonly used trading strategies, such as value investing, and trend following induce characteristic dynamics in the price. Although there is a tendency for self-fulfilling prophesies, this is not always the case; in particular, many value-investing strategies fail to make prices reflect values. When there is a diversity of perceived values, nonlinear strategies give rise to excess volatility. Many market phenomena such as trends and temporal correlations in volume and volatility have simple explanations. The theory is both simple and experimentally testable. Under this theory there is an emphasis on the interrelationships of strategies that makes it natural to regard a market as a financial ecology. A variety of examples show how diversity emerges automatically as new strategies exploit the inefficiencies of old strategies. This results in capital reallocations that evolve on longer time scales and cause apparent non-stationarities on shorter time scales. The drive toward market efficiency can be studied in the dynamical context of pattern evolution. The evolution of the capital of a strategy is analogous to the evolution of the population of a biological species. Several different arguments suggest that the time scale for market efficiency is years to decades.
Download Info
To our knowledge, this item is not available for
download. To find whether it is available, there are three
options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page
whether it is in fact available.
3. Perform a search for a similarly titled item that would be
available.
Cited by: (explanations, 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.)