Market efficiency and learning in an endogenously unstable environment

Elsevier B.V.
Publication Type:
Journal Article
Journal of Economic Dynamics and Control, 2005, 29 pp. 953 - 978
Issue Date:
Full metadata record
Files in This Item:
Filename Description SizeFormat
2006011953.pdf362.52 kBAdobe PDF
An informationally inefficiency market is produced without an exogenous source of noise in the price. Fundamental traders acquire private information directly through research. Regression traders employ a learning process to extract the private fundamental information from the public price. The relative popularity between these two strategies evolves based on performance. The model converges towards adoption of regression analysis to the point of creating instability, endogenously producing a noisy price. The lack of a revealing price in the coupled learning and population processes reflects the Grossman and Stiglitz (Amer. Econ. Rev. 70(3)(1980)393) impossibility of informationally efficient markets.
Please use this identifier to cite or link to this item: