and Johan Walden
Yuriy Fedyk: Olin School of Business, Postal: Washington University
Johan Walden: Haas School of Business, Postal: University of California at Berkeley, 545 Student Services Building # 1900, CA 94720-1900, USA
Abstract: Recent research has suggested that natural selection in financial markets may be a very slow process, taking hundreds of years. We show in a general equilibrium model that it may be much faster in markets with large state spaces. In many cases, the time it takes to wipe out irrational investors is inversely proportional to the number of stocks in the market, i.e., if it takes about 500 years with one stock, it takes about one year with 500 stocks. Thus, theoretically, natural selection can be very efficient even when there is high market uncertainty. The speed of the natural selection process is a known function of irrational investors' sentiment and of the real characteristics of the stock market. According to a calibration to U.S. stock data, it takes about fifty years for an irrational investor to be wiped out. This is in line with studies of individual investor underperformance.
38 pages, April 15, 2007
Full text files
Questions (including download problems) about the papers in this series should be directed to Anki Helmer ()
Report other problems with accessing this service to Sune Karlsson ().
This page generated on 2018-01-23 23:37:49.