economics: agents, information, & markets
Brought to you by:
Carl Plat
www.carlplat.com
cplat@yahoo.com
Economists are still discovering
how markets work. This might be little known to the thousands of market
participants who trade in the markets each day. The standard accepted theory
is that markets are efficient in that all relevant information is reflected in
market prices. As a consequence, if markets contain all information available,
any additional research effort made returns only enough to compensate the extra
effort used to gather the additional information. And usually it is added that
miss-pricings in the market, if they exist, last for only a short time so you
must be quick to take advantage of them.
A more satisfying explanation of the question
of "how markets work" comes from three areas of economics: Theories of Agent
Based Market Dynamics, Theories of Information in Prices, and Theories of
Trading Strategies & Rational Speculation. The following lists & links
will introduce you to some of the people and places where new market theories
are being developed. In these theories, markets take on strange behaviors where
markets outcomes are described as emerging, evolving, or self-organizing.
And where market participants are described as rational, nearly rational, or robots. Market participants may
compete, cooperate, or follow some form of adaptive strategy. Together, markets and
market participants interact in complex, sometimes chaotic, ways where the
passage of time and feedback effects affect outcomes. After spending time with
these theories, markets will never look the same to you.
What does all this have to do with Derivatives? Derivatives
are valued based on certain theories of how agents make decisions. In the case
of mortgage derivatives, the common practice is to use simulations to value the
derivative. These are often very simple simulations, and use very little of
what has been learned from simulations of large numbers of interacting agents,
simulations of markets, or simulation of market economies. Eventually insights
from this research will reach the modeling of derivatives. I am always looking for
insight into my own models with the help of this research.
People & Places
Dan
Friedman and Dan Friedman's Papers and
Axel
Leijonhufvud and
J. Doyne Farmer and
Jack
Hirshleifer (1925-2005) and
The New School
Profile of Jack Hirshleifer and
Larry Blume and
Leigh Tesfatsi and
Tim Cason's Home
Page and
Tim Cason's Papers and
Joseph Stiglitz and
Peter Kriz and
W. Brian Arthur and
Yin-Wong Cheung
Agent Based Comput Economics and
Economic Science
Association (ESA) and
Kardi
Teknomo's list of Simulation Journals and
Leigh Tesfatsion's
List of Individuals Engaged in ACE Research and
Mike Wooldrige's Agent Related Pages and
MultiAgen Site with List of Paperst and
Landscape Dynamics
(Friedman and Abraham of the Visual Math Institute) and
The Santa Fe Institute and
The New
School: Choice under Uncertainty and
Uncertainty
and Information and
The New School: Game
Theory and
UC Santa Cruz Experimental Laboratory: LEEPS and
Univeristy of Trento Experimental Laboratory: CEEL and
Computational Economics and
Efficient Market Hypothesis References.
Books
Jack Hirshleifer and John G. Riley,
The Analytics of Uncertainty and Information
Roger E. A. Farmer,
Macroeconomics of Self-fulfilling Prophecies - 2nd Edition
Daniel Friedman and Shyam Sunder,
Experimental Methods : A Primer for Economists
Daniel Friedman and John Rust,
The Double Auction Market: Institutions, Theories, and Evidence (Santa Fe Institute Studies in the Sciences of Complexity Proceedings)
Jean-Jacques Laffont,
The Economics of Uncertainty and Information
Papers by me:
"Introduction to the Market Microstructure Literature Applied to the Foreign Exchange Market" Dissertation UC Santa Cruz, 1995. (Pdf)
"Noisy Rational Expectations with Stochastic Fundamentals" Dissertation UC Santa Cruz, 1995. (Pdf) "A Double Auction Market with Signals of Varying Precision" Dissertation UC Santa Cruz, 1995 (Revised 1997) (Pdf) "A Mixing Model with Zero Intelligence Traders" Dissertation UC Santa Cruz, 1995. (Pdf)Papers where I contributed as a research assistant:
Timothy Cason and Daniel Friedman, "Price
Formation in Single Call Markets" Econometrica, 65(2), 1997. (Cason) Timothy Cason and Daniel Friedman, "Price Formation and
Exchange in Thin Markets: A Laboratory Comparison of Institutions",
Published in E. de Antoni, P. Howitt and A. Leijonhufvud (eds.), Money, Markets and Method: Essays in Honour of Robert W. Clower, 1999.
(Cason) Timothy Cason and Daniel Friedman, "Learning in a Laboratory Market with Random Supply and Demand" Experimental Economics, 2(1), 1999.
(Cason) Timothy Cason and Daniel Friedman, "Price Formation in Double Auction Markets" Journal of Economic Dynamics and Control, 8, 1996. Yin-Wong Cheung and Daniel Friedman, "Individual Learning in Normal Form Games: Some Laboratory Results" Games and Economic Behavior, 19, 1997. Daniel Friedman, "Equilibrium in Evolutionary Games: Some
Experimental Results" The Economic Journal, 106, 1996. Daniel Friedman, "On Evolution and Learning in Games" Cuadernos Economicos de ICE, 54(2), 1993, 171-196. Changhua Sun Rich and Daniel Friedman, "The Matching Market Institution: A Laboratory Investigation" American Economic Review, 88(5), 1998, 1311-1322.
Recent Presentations:
Carl Plat, "Troubled Assets: Elements of the Mortgage Crisis" UCSC Economics Seminar, October 2008. (Pdf)