Market Efficiency and Natural Selection in a Commodity Futures Market
Review of Financial Studies, Vol. 11, No. 3
Posted: 4 Jun 1998
Abstract
While the literature usually justifies informational efficiency in the context of rationality, this paper shows informational efficiency by applying the evolutionary idea of natural selection. In a dynamic futures market, speculators are assumed to merely act upon their predetermined trading types (buyer or seller), their predetermined fractions of wealth allocated for speculation and their inherent abilities to predict the spot price, reflected in their distributions of prediction errors with respect to the spot price. This paper shows that the proportion of time that the futures price equals the spot price converges to one with probability 1.
JEL Classification: G12, G14
Suggested Citation: Suggested Citation