Divergent behavior in markets with idiosyncratic private information
- Publication Type:
- Journal Article
- Critical Finance Review, 2017, 4 (2), pp. 181 - 213
- Issue Date:
© 2017 D. Goldbaum. A state of perpetually evolving divergent trading strategies is the natural consequence of a market with idiosyncratic private information. In the face of intrinsic uncertainty about other traders' strategies, participants resort to learning and adaptation to identify and exploit profitable trading opportunities. Model-consistent use of market-based information generally improves price performance but can inadvertently produce episodes of sudden mispricing. The paper examines the impact of trader's use of information and bounded rationality on price efficiency.
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