Learning and Adaptation as a Source of Market Failure

David Goldbaum

No 14, Working Paper Series from Economics Discipline Group, UTS Business School, University of Technology, Sydney

Abstract: In the developed model, without knowing the trading strategies of the other traders in a financial market, traders cannot derive a rational expectations equilibrium. In a dynamic setting, market participants employ learning and adaptation to develop trading strategies to accommodate for this information de ficiency. Model-consistent use of market-based information generally improves price performance. It can also produce episodes of extreme sudden mispricing despite model generated historical support for its use. Simulations examine the impact of information constraints and bounded rationality on general price efficiency and sudden market mispricing.

Keywords: Heterogeneous Agents; Efficient Markets; Learning; Dynamics; Computational Economics; Market Failure (search for similar items in EconPapers)
JEL-codes: C62 D82 G14 (search for similar items in EconPapers)
Pages: 37
Date: 2013-08-01
New Economics Papers: this item is included in nep-cmp and nep-ict
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