Self-organization and the persistence of noise in financial markets |
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| Affiliation: | 1. Faculty of Law and Economics, Martin-Luther-University Halle-Wittenberg, 06099 Halle, Germany;2. IWH, Halle, Germany;3. Faculty of Business Administration, University of Applied Sciences and Arts Coburg, Box 1652, 96406 Coburg, Germany;1. George Dean Johnson, Jr. College of Business and Economics, University of South Carolina Upstate, 160 East St. John Street, Spartanburg, SC 29306, USA;2. Bank of England, Threadneedle Street, London, EC2R 8AH, United Kingdom;3. Department of Finance, Economics, and Accounting, School of Business and Industry, Jacksonville State University, 700 Pelham Road North, Jacksonville, AL 36265, USA;4. Department of Economics, Finance, and Quantitative Analysis, Brock School of Business, Samford University, 800 Lakeshore Drive, Birmingham, AL 35229, USA |
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| Abstract: | A dynamic model of financial markets with learning is demonstrated to produce a self-organized system that displays critical behavior. The price contains private information that traders learn to extract and employ to forecast future value. Since the price reflects the beliefs of the traders, the learning process is self-referencing. As the market learns to correctly extract information from the price, the market deemphasizes private information. Despite the convergence of the model towards the parameters producing efficiency, pricing deviations remain constant due to the increased sensitivity of the price to small errors in information extraction produced by the model's own convergence. |
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