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Conservative traders, natural selection and market efficiency

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  • Luo, Guo Ying

Abstract

This paper examines the impact of conservative traders on market efficiency in an evolutionary model of a commodity futures market. This paper shows that the long-run market outcome is informationally efficient, as long as in every period there is a positive probability that entering traders are more conservative than their predecessors. Conservative traders are those who correctly predict the spot price with a positive probability, and more importantly, who in their mistakes err on the side of caution, and rarely overpredict the spot price as buyers, and underpredict the spot price as sellers. This result does not require entry of traders with better information than their predecessors.

Suggested Citation

  • Luo, Guo Ying, 2012. "Conservative traders, natural selection and market efficiency," Journal of Economic Theory, Elsevier, vol. 147(1), pages 310-335.
  • Handle: RePEc:eee:jetheo:v:147:y:2012:i:1:p:310-335
    DOI: 10.1016/j.jet.2011.10.016
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    References listed on IDEAS

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    More about this item

    Keywords

    Conservative traders; Evolution; Survivor; Market rationality; Natural selection; Market efficiency;

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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