Statistical mechanics of asset markets with private information

Details Statistical mechanics of asset markets with private information Statistical mechanics of asset markets with private information

2001-01-23

arxiv.org/abs/cond-mat/0101351v1

Physics

Condensed Matter

Statistical Mechanics

22 pages 4 figures. To appear on J.Quant.Finance

Scientific paper

Traders in a market typically have widely different, private information on the return of an asset. The equilibrium price of the asset may reflect this information more accurately if the number of traders is large enough compared to the number of the states of the world that determine the return of the asset. We study the transition from markets where prices do not reflect the information accurately into markets where it does. In competitive markets, this transition takes place suddenly, at a critical value of the ratio between number of states and number of traders. The Nash equilibrium market behaves quite differently from a competitive market even in the limit of large economies.

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