Divergent Behavior in Markets with Idiosyncratic Private Information
40 Pages Posted: 22 Feb 2016
Date Written: February 22, 2016
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: Suggested Citation