Are financial markets efficient?: phase transition in the aggregation of information

  • Authors:

  • Johannes Berg;Matteo Marsili;Aldo Rustichini;Riccardo Zecchina

  • Affiliations:

  • Institut für Theoretische Physik, Universität zu Köln, Zülpicherstr. 77, 50937 Köln, Germany;Istituto Nazionale per la Fisica della Materia (INFM), Unitá Trieste-SISSA, 34014 Trieste, Italy;Department of Economics, University of Minnesota, Minneapolis, Minnesota;Abdus Salam International Center for Theoretical Physics, 34100 Trieste, Italy

  • Venue:
  • Complexity - Complex Adaptive systems: Part I
  • Year:
  • 2002

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Abstract

Financial markets can be considered as collective information processing devices, which aggregate the information on relevant events into market prices. We show that, in a simple model, markets are efficient aggregators of information only if the number of traders is sufficiently large compared to the number of relevant events. The transition to an efficient market occurs through a phase transition, well known from critical phenomena in physics.