Working Paper: NBER ID: w3209
Authors: Ian Gale; Joseph E. 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.
Keywords: Futures markets; Informational efficiency; Risk aversion
JEL Codes: G14; D81
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| constant absolute risk aversion utility (D11) | informational efficiency of the market (G14) |
| constant relative risk aversion utility (D11) | informational efficiency of the market (G14) |
| different coefficients of relative risk aversion (D11) | futures price not fully revealing (G13) |
| utility functions (D11) | market efficiency (G14) |