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Dynamics of value-tracking in financial markets
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Beale, Nicholas C. L., Gunton, Richard M., Bashe, Kutlwano L., Battey, Heather S. and MacKay, Robert S. (2024) Dynamics of value-tracking in financial markets. Journal of Dynamics and Games . doi:10.3934/jdg.2024003 ISSN 2164-6066. (In Press)
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Official URL: http://doi.org/10.3934/jdg.2024003
Abstract
The efficiency of a modern economy depends on value-tracking: that market prices of key assets broadly track some underlying value. This can be expected if a sufficient weight of market participants are valuation-based traders, buying and selling an asset when its price is, respectively, below and above their well-informed private valuations. Such tracking will never be perfect, and we propose a natural unit of tracking error, the 'deciblack'. We then use a simple discrete-time model to show how large tracking errors can arise if enough market participants are not valuation-based traders, regardless of how much information the valuation-based traders have. Similarly to Lux [17] and others who study subtly different models, we find a threshold above which value-tracking breaks down without any changes in the underlying value of the asset. We propose an estimator of the tracking error and establish its statistical properties. Because financial markets are increasingly dominated by non-valuation-based traders, assessing how much valuation-based investing is required for reasonable value tracking is of urgent practical interest.
Item Type: | Journal Article | ||||||
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Alternative Title: | |||||||
Subjects: | H Social Sciences > HG Finance Q Science > QA Mathematics |
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Divisions: | Faculty of Science, Engineering and Medicine > Science > Mathematics | ||||||
Library of Congress Subject Headings (LCSH): | Financial institutions -- Mathematical models, Investments -- Mathematical models, Capital assets pricing model, Business mathematics, Economics, Mathematical | ||||||
Journal or Publication Title: | Journal of Dynamics and Games | ||||||
Publisher: | American Institute of Mathematical Sciences (A I M S Press) | ||||||
ISSN: | 2164-6066 | ||||||
Official Date: | February 2024 | ||||||
Dates: |
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DOI: | 10.3934/jdg.2024003 | ||||||
Status: | Peer Reviewed | ||||||
Publication Status: | In Press | ||||||
Re-use Statement: | This article has been accepted for publication in a revised form in Journal of Dynamics and Games http://doi.org/10.3934/jdg.2024003. This version is free to download for private research and study only. Not for redistribution, re-sale or use in derivative works. | ||||||
Access rights to Published version: | Restricted or Subscription Access | ||||||
Date of first compliant deposit: | 10 January 2024 | ||||||
Date of first compliant Open Access: | 10 January 2024 | ||||||
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