Are Financial Markets Efficient?
The financial market is largely driven by speculation. So we must consider the efficiency of financial markets. Financial efficiency is truly defined only in terms of the risk calculation.
This idea must be distinguished from the classical idea of efficiency. In short, financial traders have nothing to do with their fixed inner preferences, because they have no reason to preserve their preferences for particular kinds of financial commodities. Thus this proposition is rejected by the classical ideas of traditional economics. Looking back on the history of economics, the idea of efficiency is derived from the assumptions that the agent should keep a constant list of his/her own preferences, even if he is permitted to estimate others’ preferences and add his own to them. Ifhe should give up working to his own innate preference, his preference would no longer be properly appreciated in the theory of optimization. In other words, first, the domain of preference is given. Second, a maximum set is attained over the objective function (for example, the utility function) constructed on the domain. If the agent leaves the domain, his optimization can no longer be guaranteed.However, the financial auction presumes that any agent can be or can imitate any other by his transition, typically from seller to buyer or buyer to seller. Sometimes this transition is regarded as the mixed strategy policy. In financial trading, it is meaningless to cling to something that has been especially fixed. So agents’ behavior is free from the subjective criteria of individualistic preferences. The introduction of random preference will not change this.
Lemma 1.3. Classical efficiency must be distinguished from financial efficiency (disclaimer Ofindividualisticfixed preference relationship in the auction).
I now touch on the technical details of the serious difference between the classical and financial matching mechanisms.
In the market, there are two different kinds of order, market order and limit order. Market order is the order created without any bidding or asking price (the contract price is given by the market).[16] Such a distinction may also be allowed in an auction. An important feature of the classical trading system is marked by the rule that an agent never gives up their original preference until the trade session is completed. However, in a financial auction, a trader adopts a mixed strategy of being both seller and buyer, depending on circumstances, so that their original preference is irrelevant. In financial trading, the risk preference on future expected margins will dominate.Lemma 1.4. The exchange rate for bread has nothing to do with the exchange rate for financial dealings.
In the classical system, the agent who sets the desired amount of a set of price and quantity to trade with an arbitrary agent must have an independent plan, which is never influenced by the environment but only inner preference. The agent must therefore cancel the original offer if things do not go to plan. Suppose that the agent is a buyer who wants to purchase a desired good whose price is currently lower than he is prepared to pay. In this case, where there is any market order to sell, any purchase plan could be at least partly fulfilled. Here, let the concerned buyer be the person who obtains a contract. As the quoted price is raised to a price higher than the buyer’s planned price, the buyer will give up the contract right to purchase. The buyer must then become a seller of the obtained amount, adding to the market supply. However, this transition from buyer to seller must not be realized in the Walrasian tatonnement, because all the contracts obtained before equilibrium are canceled.
The actual bidding/asking mechanism, i.e., the supply and demand curves, can usually provide the participants with all the information they need. This knowledge is sufficient to activate the agent reactions, which lead to the second stage of coordination. This may no longer be based on the original preference but rather interactive effects.
A buyer could be allowed to change into a seller, or vice versa. In financial markets, buyer or seller is only a temporary state. Notice that the transition from buyer to seller or the reverse must be fulfilled in the financial market. The buyer who temporarily gives up his demand can wait for a future price rise as a potential seller. An agent wishes to make potential extra profit, so he must bet on the right side of a rising price. This is a gamble, but see Aruka and Koyama (2011, p. 149) for the inner mechanism of a double auction.
Lemma 1.5. An agent wishes to make potential extra profit, which is a gamble. Its efficiency is not linked to efficiency in traditional economics.
1.8.3