A quantitative description for efficient financial markets

A1 Journal article (refereed)


Internal Authors/Editors


Publication Details

List of Authors: Immonen E
Publisher: ELSEVIER SCIENCE BV
Publication year: 2015
Journal: Physica A: Statistical Mechanics and its Applications
Journal acronym: PHYSICA A
Volume number: 433
Start page: 171
End page: 181
Number of pages: 11
ISSN: 0378-4371
eISSN: 1873-2119


Abstract

In this article we develop a control system model for describing efficient financial markets. We define the efficiency of a financial market in quantitative terms by robust asymptotic price-value equality in this model. By invoking the Internal Model Principle of robust output regulation theory we then show that under No Bubble Conditions, in the proposed model, the market is efficient if and only if the following conditions hold true: (1) the traders, as a group, can identify any mispricing in asset value (even if no one single trader can do it accurately), and (2) the traders, as a group, incorporate an internal model of the value process (again, even if no one single trader knows it). This main result of the article, which deliberately avoids the requirement for investor rationality, demonstrates, in quantitative terms, that the more transparent the markets are, the more efficient they are. An extensive example is provided to illustrate the theoretical development.


Keywords

Asset value dynamics, Efficient market hypothesis, Internal model principle, Tatonnenent, Value discovery

Last updated on 2020-21-01 at 04:19