Frontiers of Finance: Evolution and Efficient Markets

J. Farmer and Andrew Lo ()

Working Papers from Santa Fe Institute

Abstract: In this review article, we explore several recent advances in the quantitative modeling of financial markets. We begin with the Efficient Markets Hypothesis and describe how this controversial idea has stimulated a number of new directions of research, some focusing on more elaborate mathematical models that are capable of rationalizing the empirical facts, others taking a completely different tack in rejecting rationality altogether. One of the most promising directions is to view financial markets from a biological perspective and, specifically, within an evolutionary framework in which markets, instruments, institutions, and investors interact and evolve dynamically according to the "law" of economic selection. Under this view, financial agents compete and adapt, but they do not necessarily do so in an optimal fashion. Evolutionary and ecological models of financial markets is truly a new frontier whose exploration has just begun.

Published in Proceedings of the National Academy of Science 96(1999) 9991-9992.

Keywords: Finance; efficient markets; market evolution (search for similar items in EconPapers)
Date: 1999-06
New Economics Papers: this item is included in nep-cmp, nep-fin, nep-ifn, nep-mic and nep-pke
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (46)

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Persistent link: https://EconPapers.repec.org/RePEc:wop:safiwp:99-06-039

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