Selection in asset markets: the good, the bad, and the unknown
AbstractIn this paper, we use a series of simple examples to illustrate how wealth-driven selection works in a market for Arrow securities. Our analysis delivers both a good and a bad message. The good message is that, when traders invest constant fractions of their wealth in each asset and have equal consumption rates, markets are informationally effcient: the best informed agent is rewarded and asset prices eventually reflect this information. However, and this is the bad message, when asset demands are not constant fractions of wealth but dependent upon prices, markets might behave suboptimally. In this case, asymptotic prices depend on preferences and beliefs of the whole ecology of traders and do not, in general, reflect the best available information. We show that the key difference between the two cases lies in the local, i.e. price dependent, versus global nature of wealth-driven selection.
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Bibliographic InfoPaper provided by Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy in its series LEM Papers Series with number 2011/11.
Date of creation: 17 May 2011
Date of revision:
Market Selection; Evolutionary Finance; Informational Efficiency; Asset Pricing; CRRA Preferences;
Other versions of this item:
- Giulio Bottazzi & Pietro Dindo, 2013. "Selection in asset markets: the good, the bad, and the unknown," Journal of Evolutionary Economics, Springer, vol. 23(3), pages 641-661, July.
- D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
- D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
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