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The Inefficient Markets Hypothesis: Why Financial Markets Do Not Work Well in the Real World / Roger E.A. Farmer, Carine Nourry, Alain Venditti.
- Format:
- Book
- Author/Creator:
- Farmer, Roger E.A.
- Series:
- Working Paper Series (National Bureau of Economic Research) no. w18647.
- NBER working paper series no. w18647
- Language:
- English
- Physical Description:
- 1 online resource: illustrations (black and white);
- Place of Publication:
- Cambridge, Mass. National Bureau of Economic Research 2012.
- Summary:
- Existing literature continues to be unable to offer a convincing explanation for the volatility of the stochastic discount factor in real world data. Our work provides such an explanation. We do not rely on frictions, market in completeness or transactions costs of any kind. Instead, we modify a simple stochastic representative agent model by allowing for birth and death and by allowing for heterogeneity in agents' discount factors. We show that these two minor and realistic changes to the timeless Arrow-Debreu paradigm are sufficient to invalidate the implication that competitive financial markets efficiently allocate risk. Our work demonstrates that financial markets, by their very nature, cannot be Pareto efficient except by chance. Although individuals in our model are rational; markets are not.
- Notes:
- Print version record
- December 2012.
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