Efficiency and Stability in Complex Financial Markets

Efficiency and Stability in Complex Financial Markets

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.

via Efficiency and Stability in Complex Financial Markets by Fabio Caccioli, Matteo Marsili :: SSRN.

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Comments

  1. don says:

    I never understood why changing margin requirements hasn't been used more effectively as a tool to control bubbles. Commodity markets change margin requirement all the time. I strongly believe that the Fed could have mitigated the dot-com bubble by raising margin requirements, as opposed to raising interest rates. I saw a study where the Fed said that modifying margin didn't impact the economy. But the study only looked at a limited time frame. We never had a post-War bull market like we did in 1999 with so many people owning stocks.