Natural Selection, Random Shocks, and Market Efficiency in a Futures Market

Guo Ying Luo ()
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Guo Ying Luo: McMaster University

Chapter Chapter 5 in Evolutionary Foundations of Equilibria in Irrational Markets, 2012, pp 89-112 from Springer

Abstract: Abstract This chapter adds a random shock to the futures market to see if an informationally efficient equilibrium would still occur. In this chapter, the prices are modeled as continuous variables and traders can buy or sell with a single submission of their quotes. The conclusion is that,with probability one, if the volatility of the underlying spot market is sufficiently small, then the proportion of time that the futures price is sufficiently close to the fundamental value converges to one. However, the interval containing the fundamental value, where the futures price eventually lies, is influenced by the underlying volatility generated from the spot market. In other words, the accuracy of the information for which the market can eventually select, depends on the volatility generated from the random shock in the spot market. The more volatile the spot market, the more noisy is the information that gets selected for. As a result, the futures market moves further away from informational efficiency. Numerical examples are used to illustrate the cause of the convergence and how the wealth is redistributed among traders.

Keywords: Prediction Error; Accurate Information; Future Market; Future Price; Future Contract (search for similar items in EconPapers)
Date: 2012
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Persistent link: https://EconPapers.repec.org/RePEc:spr:steccp:978-1-4614-0712-6_5

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DOI: 10.1007/978-1-4614-0712-6_5

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