Divergent Behavior in Markets with Idiosyncratic Private Information

40 Pages Posted: 22 Feb 2016

See all articles by David Goldbaum

David Goldbaum

University of Technology Sydney

Date Written: February 22, 2016

Abstract

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.

Keywords: Heterogeneous Agents, Efficient Markets, Learning, Dynamics, Computational Economics

JEL Classification: G14, C62, D82

Suggested Citation

Goldbaum, David, Divergent Behavior in Markets with Idiosyncratic Private Information (February 22, 2016). Available at SSRN: https://ssrn.com/abstract=2735947 or http://dx.doi.org/10.2139/ssrn.2735947

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