Learning and Adaptation as a Source of Market Failure
AbstractIn the developed model, without knowing the trading strategies of the other traders in a financial market, traders cannot derive a rational expectations equilibrium. In a dynamic setting, market participants employ learning and adaptation to develop trading strategies to accommodate for this information de ficiency. Model-consistent use of market-based information generally improves price performance. It can also produce episodes of extreme sudden mispricing despite model generated historical support for its use. Simulations examine the impact of information constraints and bounded rationality on general price efficiency and sudden market mispricing.
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Bibliographic InfoPaper provided by Economics Discipline Group, UTS Business School, University of Technology, Sydney in its series Working Paper Series with number 14.
Date of creation: 01 Aug 2013
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Heterogeneous Agents; Efficient Markets; Learning; Dynamics; Computational Economics; Market Failure;
Find related papers by JEL classification:
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
- C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-09-06 (All new papers)
- NEP-CMP-2013-09-06 (Computational Economics)
- NEP-ICT-2013-09-06 (Information & Communication Technologies)
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