In this paper, we use a series of simple examples to illustrate how wealth- driven selection works in a market for Arrow securities. Our analysis delivers both a good and a bad message. The good message is that, when traders invest constant fractions of their wealth in each asset and have equal consumption rates, markets are informationally efficient: the best informed agent is rewarded and asset prices eventually reflect this information. However, and this is the bad message, when asset demands are not constant fractions of wealth but dependent upon prices, markets might behave sub-optimally. In this case, asymptotic prices depend on preferences and beliefs of the whole ecology of traders and do not, in general, reflect the best available information. We show that the key difference between the two cases lies in the local, i.e. price dependent, versus global nature of wealth-driven selection.

Selection in asset markets: The good, the bad, and the unknown

DINDO, Pietro Dino Enrico
2013-01-01

Abstract

In this paper, we use a series of simple examples to illustrate how wealth- driven selection works in a market for Arrow securities. Our analysis delivers both a good and a bad message. The good message is that, when traders invest constant fractions of their wealth in each asset and have equal consumption rates, markets are informationally efficient: the best informed agent is rewarded and asset prices eventually reflect this information. However, and this is the bad message, when asset demands are not constant fractions of wealth but dependent upon prices, markets might behave sub-optimally. In this case, asymptotic prices depend on preferences and beliefs of the whole ecology of traders and do not, in general, reflect the best available information. We show that the key difference between the two cases lies in the local, i.e. price dependent, versus global nature of wealth-driven selection.
File in questo prodotto:
File Dimensione Formato  
bd_jeec_13p.pdf

non disponibili

Tipologia: Versione dell'editore
Licenza: Accesso chiuso-personale
Dimensione 644.03 kB
Formato Adobe PDF
644.03 kB Adobe PDF   Visualizza/Apri

I documenti in ARCA sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.

Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/10278/3673625
Citazioni
  • ???jsp.display-item.citation.pmc??? ND
  • Scopus 15
  • ???jsp.display-item.citation.isi??? 12
social impact