A computational view of market efficiency
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Lo_A computational.pdf
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Author(s)
Hasanhodzic, Jasmina
Lo, Andrew W.
Viola, Emanuele
Date Issued
June 2011
Journal
Quantitative Finance
Publisher
Taylor & Francis
Citation
Hasanhodzic, Jasmina, Andrew W. Lo, and Emanuele Viola. “A Computational View of Market Efficiency.” Quantitative Finance 11.7 (2011): 1043–1050.
Version
Author's final manuscript
Abstract
We study market efficiency from a computational viewpoint. Borrowing from theoretical computer science, we define a market to be 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 spikes 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.
Description
August 31, 2009
MIT Department
Sloan School of Management
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Creative Commons Attribution-Noncommercial-Share Alike 3.0
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DOI of Published Version
https://doi.org/10.1080/14697688.2010.541487
