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Conservative traders, natural selection and market efficiency

  • Luo, Guo Ying
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    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.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0022053111001499
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    Article provided by Elsevier in its journal Journal of Economic Theory.

    Volume (Year): 147 (2012)
    Issue (Month): 1 ()
    Pages: 310-335

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    Handle: RePEc:eee:jetheo:v:147:y:2012:i:1:p:310-335
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622869

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    1. Luo, Guo Ying, 2009. "Irrationality and monopolistic competition: An evolutionary approach," European Economic Review, Elsevier, vol. 53(5), pages 512-526, July.
    2. Sandroni, Alvaro, 2005. "Market selection when markets are incomplete," Journal of Mathematical Economics, Elsevier, vol. 41(1-2), pages 91-104, February.
    3. Benos, Alexandros V., 1998. "Aggressiveness and survival of overconfident traders," Journal of Financial Markets, Elsevier, vol. 1(3-4), pages 353-383, September.
    4. Alvaro Sandroni, 2000. "Do Markets Favor Agents Able to Make Accurate Predicitions?," Econometrica, Econometric Society, vol. 68(6), pages 1303-1342, November.
    5. George J. Mailath & Alvaro Sroni, . "Market Selection and Asymmetric Information," Penn CARESS Working Papers d50f0ddbbf9f79b6e05bb90a5, Penn Economics Department.
    6. Hirshleifer, David & Luo, Guo Ying, 2001. "On the survival of overconfident traders in a competitive securities market," Journal of Financial Markets, Elsevier, vol. 4(1), pages 73-84, January.
    7. J. Bradford De Long & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1988. "The Survival of Noise Traders in Financial Markets," NBER Working Papers 2715, National Bureau of Economic Research, Inc.
    8. Shlomo Benartzi & Richard H. Thaler, 1993. "Myopic Loss Aversion and the Equity Premium Puzzle," NBER Working Papers 4369, National Bureau of Economic Research, Inc.
    9. Leonid Kogan & Stephen Ross, 2004. "The Price Impact and Survival of Irrational Traders," 2004 Meeting Papers 35, Society for Economic Dynamics.
    10. Kyle, Albert S & Wang, F Albert, 1997. " Speculation Duopoly with Agreement to Disagree: Can Overconfidence Survive the Market Test?," Journal of Finance, American Finance Association, vol. 52(5), pages 2073-90, December.
    11. Luo Guo Ying, 1995. "Evolution and Market Competition," Journal of Economic Theory, Elsevier, vol. 67(1), pages 223-250, October.
    12. Patel, Jayendu & Zeckhauser, Richard & Hendricks, Darryll, 1991. "The Rationality Struggle: Illustrations from Financial Markets," American Economic Review, American Economic Association, vol. 81(2), pages 232-36, May.
    13. Beker, Pablo F., 2004. "Are inefficient entrepreneurs driven out of the market?," Journal of Economic Theory, Elsevier, vol. 114(2), pages 329-344, February.
    14. Biais, Bruno & Shadur, Raphael, 2000. "Darwinian selection does not eliminate irrational traders," European Economic Review, Elsevier, vol. 44(3), pages 469-490, March.
    15. Sciubba, E., 1999. "Asymmetric Information and Survival in Financial Markets," Cambridge Working Papers in Economics 9908, Faculty of Economics, University of Cambridge.
    16. Guo Ying (Rosemary) Luo, 2001. "Evolution, Efficiency and Noise Traders in a One-Sided Auction Market," Computing in Economics and Finance 2001 49, Society for Computational Economics.
    17. Luo, Guo Ying, 1998. "Market Efficiency and Natural Selection in a Commodity Futures Market," Review of Financial Studies, Society for Financial Studies, vol. 11(3), pages 647-74.
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