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Price distortions under coarse reasoning with frequent trade
- 1.0455392 - NHÚ 2016 RIV US eng J - Journal Article
Steiner, Jakub - Stewart, C.
Price distortions under coarse reasoning with frequent trade.
Journal of Economic Theory. 159 A, September (2015), s. 574-595. ISSN 0022-0531. E-ISSN 1095-7235
Institutional support: RVO:67985998
Keywords : categorization * bounded rationality * prices
Subject RIV: AH - Economics
Impact factor: 1.097, year: 2015
We study the effect of frequent trading opportunities and categorization on pricing of a risky asset. Frequent opportunities to trade can lead to large distortions in prices if some agents forecast future prices using a simplified model of the world that fails to distinguish between some states. In the limit as the period length vanishes, these distortions take a particular form: the price must be the same in any two states that a positive mass of agents categorize together. Price distortions therefore tend to be large when different agents categorize states in different ways, even if each individual's categorization is not very coarse.
Permanent Link: http://hdl.handle.net/11104/0256009
Number of the records: 1