A Study of Neo-Austrian Economics using an Artificial Stock Market

Harald A. Benink, Jose Luis Gordillo, Juan Pablo Pardo-Guerra and Christopher R. Stephens
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Harald A. Benink: Rotterdam School of Management, Erasmus University
Jose Luis Gordillo: Universidad Nacional Autónoma de México UNAM
Christopher R. Stephens: Universidad Nacional Autónoma de México UNAM

Finance from University Library of Munich, Germany

Abstract: An agent-based artificial financial market (AFM) is used to study market efficiency and learning in the context of the Neo-Austrian economic paradigm. Efficiency is defined in terms of the 'excess' profits associated with different trading strategies, where excess for an active trading strategy is defined relative to a dynamic buy and hold benchmark. We define an Inefficiency matrix that takes into account the difference in excess profits of one trading strategy versus another ('signal') relative to the standard error of those profits ('noise') and use this statistical measure to gauge the degree of market efficiency. A one-parameter family of trading strategies is considered, the value of the parameter measuring the relative 'informational' advantage of one strategy versus another. Efficiency is then investigated in terms of the composition of the market defined in terms of the relative proportions of traders using a particular strategy and the parameter values associated with the strategies. We show that markets are more efficient when informational advantages are small (small signal) and when there are many coexisting signals. Learning is introduced by considering 'copycat' traders that learn the relative values of the different strategies in the market and copy the most successful one. We show how such learning leads to a more informationally efficient market but can also lead to a less efficient market as measured in terms of excess profits. It is also shown how the presence of exogeneous information shocks that change trader expectations increases efficiency and complicates the inference problem of copycats.

Keywords: Neoaustrian economics; Market efficiency; Artificial financial market; Learning; Adaptation (search for similar items in EconPapers)
JEL-codes: G (search for similar items in EconPapers)
Pages: 41 pages
Date: 2004-11-17
New Economics Papers: this item is included in nep-fin and nep-hpe
Note: Type of Document - pdf; pages: 41. Presented at the EFA 2004 Maastricht Meeting
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Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpfi:0411038

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