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A Simple Proof That Futures Markets are Almost Always Informationally Inefficient

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  • Ian Gale
  • Joseph Stiglitz

Abstract

Previous work which showed that prices could aggregate perfectly the diverse information of traders depended critically on the assumption that all agents had constant absolute risk utility. We show that either all agents must have constant absolute risk aversion utility, or all must have constant relative aversion in order for the strong form of the efficient market hypothesis to hold generically.

Suggested Citation

  • Ian Gale & Joseph Stiglitz, 1989. "A Simple Proof That Futures Markets are Almost Always Informationally Inefficient," NBER Working Papers 3209, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:3209
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    References listed on IDEAS

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    1. Grossman, Sanford J & Stiglitz, Joseph E, 1980. "On the Impossibility of Informationally Efficient Markets," American Economic Review, American Economic Association, vol. 70(3), pages 393-408, June.
    2. Radner, Roy, 1979. "Rational Expectations Equilibrium: Generic Existence and the Information Revealed by Prices," Econometrica, Econometric Society, vol. 47(3), pages 655-678, May.
    3. Tirole, Jean, 1982. "On the Possibility of Speculation under Rational Expectations," Econometrica, Econometric Society, vol. 50(5), pages 1163-1181, September.
    4. Jordan, J S, 1983. "On the Efficient Markets Hypothesis," Econometrica, Econometric Society, vol. 51(5), pages 1325-1343, September.
    5. Jerry Green, 1977. "The Non-existence of Informational Equilibria," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 44(3), pages 451-463.
    6. Albert S. Kyle, 1989. "Informed Speculation with Imperfect Competition," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 56(3), pages 317-355.
    7. Bray, Margaret M, 1981. "Futures Trading, Rational Expectations, and the Efficient Markets Hypothesis," Econometrica, Econometric Society, vol. 49(3), pages 575-596, May.
    8. Grossman, Sanford J & Stiglitz, Joseph E, 1976. "Information and Competitive Price Systems," American Economic Review, American Economic Association, vol. 66(2), pages 246-253, May.
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    Cited by:

    1. Coffinet, J., 2008. "La prévision des taux d’intérêt à partir de contrats futures : l’apport de variables économiques et financières," Working papers 193, Banque de France.
    2. Bruce C. Greenwald & Joseph E. Stiglitz, 1991. "Information, Finance, and Markets: The Architecture of Allocative Mechanisms," NBER Working Papers 3652, National Bureau of Economic Research, Inc.

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