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Market Efficiency and Natural Selection in a Commodity Futures Market

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  • Luo, Guo Ying

Abstract

While the literature usually justifies informational efficiency in the context of rationality, this article shows informational efficiency by applying the evolutionary idea of natural selection. In a dynamic futures market, speculators are assumed to merely act upon their predetermined trading types (buyer or seller), their predetermined fractions of wealth allocated for speculation, and their inherent abilities to predict the spot price, reflected in their distributions of prediction errors with respect to the spot price. This article shows that the proportion of time that the futures price equals the spot price converges to one with probability 1. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

Suggested Citation

  • 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 647-674.
  • Handle: RePEc:oup:rfinst:v:11:y:1998:i:3:p:647-74
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    Cited by:

    1. 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.
    2. Cronqvist, Henrik & Siegel, Stephan, 2014. "The genetics of investment biases," Journal of Financial Economics, Elsevier, vol. 113(2), pages 215-234.
    3. Mila Getmansky & Peter A. Lee & Andrew W. Lo, 2015. "Hedge Funds: A Dynamic Industry In Transition," NBER Working Papers 21449, National Bureau of Economic Research, Inc.
    4. Cavaliere, Giuseppe & Nielsen, Morten Ørregaard & Taylor, A.M. Robert, 2015. "Bootstrap score tests for fractional integration in heteroskedastic ARFIMA models, with an application to price dynamics in commodity spot and futures markets," Journal of Econometrics, Elsevier, vol. 187(2), pages 557-579.
    5. Luo, Guo Ying, 2003. "Evolution, efficiency and noise traders in a one-sided auction market," Journal of Financial Markets, Elsevier, vol. 6(2), pages 163-197, April.
    6. Dai, Darong, 2011. "Wealth Martingale and Neighborhood Turnpike Property in Dynamically Complete Market with Heterogeneous Investors," MPRA Paper 46416, University Library of Munich, Germany.
    7. Luo, Guo Ying, 2012. "Conservative traders, natural selection and market efficiency," Journal of Economic Theory, Elsevier, vol. 147(1), pages 310-335.
    8. Darong Dai, 2013. "Wealth Martingale and Neighborhood Turnpike Property In Dynamically Complete Market With Heterogeneous Investors," Economic Research Guardian, Weissberg Publishing, vol. 3(2), pages 86-110, December.

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