Efficiency and Stability in Complex Financial Markets

14 Pages Posted: 18 Dec 2010  

Fabio Caccioli

International School of Advanced Studies (SISSA)

Matteo Marsili

Abdus Salam International Centre for Theoretical Physics (ICTP)

Date Written: 2010

Abstract

The authors study a simple model of an asset market with informed and non-informed agents. In the absence of non-informed agents, the market becomes information efficient when the number of traders with different private information is large enough. Upon introducing non-informed agents, the authors find that the latter contribute significantly to the trading activity if and only if the market is (nearly) information efficient. This suggests that information efficiency might be a necessary condition for bubble phenomena - induced by the behavior of non-informed traders - or conversely that throwing some sands in the gears of financial markets may curb the occurrence of bubbles.

Keywords: Interacting agents models, market efficiency, market stability, statistical mechanics of financial market

JEL Classification: G01, G14

Suggested Citation

Caccioli, Fabio and Marsili, Matteo, Efficiency and Stability in Complex Financial Markets (2010). Economics: The Open-Access, Open-Assessment E-Journal, Vol. 4, Issue 25, pp. 1-18, 2010. Available at SSRN: https://ssrn.com/abstract=1726781 or http://dx.doi.org/10.5018/economics-ejournal.ja.2010-25

Fabio Caccioli (Contact Author)

International School of Advanced Studies (SISSA) ( email )

via Beirut 2-4
Trieste, 34014
Italy

Matteo Marsili

Abdus Salam International Centre for Theoretical Physics (ICTP) ( email )

Strada Costiera 11
Trieste, 34014
Italy

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