Computer Science – Computational Engineering – Finance – and Science
Scientific paper
2009-08-31
Computer Science
Computational Engineering, Finance, and Science
Scientific paper
We propose to study market efficiency from a computational viewpoint. Borrowing from theoretical computer science, we define a market to be \emph{efficient with respect to resources $S$} (e.g., time, memory) if no strategy using resources $S$ can make a profit. As a first step, we consider memory-$m$ strategies whose action at time $t$ depends only on the $m$ previous observations at times $t-m,...,t-1$. We introduce and study a simple model of market evolution, where strategies impact the market by their decision to buy or sell. We show that the effect of optimal strategies using memory $m$ can lead to "market conditions" that were not present initially, such as (1) market bubbles and (2) the possibility for a strategy using memory $m' > m$ to make a bigger profit than was initially possible. We suggest ours as a framework to rationalize the technological arms race of quantitative trading firms.
Hasanhodzic Jasmina
Lo Andrew W.
Viola Emanuele
No associations
LandOfFree
A Computational View of Market Efficiency does not yet have a rating. At this time, there are no reviews or comments for this scientific paper.
If you have personal experience with A Computational View of Market Efficiency, we encourage you to share that experience with our LandOfFree.com community. Your opinion is very important and A Computational View of Market Efficiency will most certainly appreciate the feedback.
Profile ID: LFWR-SCP-O-221162