TY  - JOUR
AU  - Farmer,Roger E.A.
AU  - Nourry,Carine
AU  - Venditti,Alain
TI  - The Inefficient Markets Hypothesis: Why Financial Markets Do Not Work Well in the Real World
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 18647
PY  - 2012
Y2  - December 2012
UR  - http://www.nber.org/papers/w18647
L1  - http://www.nber.org/papers/w18647.pdf
N1  - Author contact info:
Roger Farmer
UCLA
Department of Economics
Box 951477
Los Angeles, CA 90095-1477
Tel: 310/825-6547
Fax: 310/825-9528
E-Mail: rfarmer@econ.ucla.edu

Carine Nourry
GREQAM
2 rue de la Charite
13236 Marseille cedex 02
France
E-Mail: carine.nourry@univmed.fr

Alain Venditti
GREQAM
2 rue de la Charite
13236 Marseille cedex 02
France
E-Mail: alain.venditti@univmed.fr
AB  - Existing literature continues to be unable to offer a convincing explanation for the volatility of the stochastic discount factor in real world data. Our work provides such an explanation. We do not rely on frictions, market incompleteness or transactions costs of any kind. Instead, we modify a simple stochastic representative agent model by allowing for birth and death and by allowing for heterogeneity in agents' discount factors. We show that these two minor and realistic changes to the timeless Arrow-Debreu paradigm are sufficient to invalidate the implication that competitive financial markets efficiently allocate risk. Our work demonstrates that financial markets, by their very nature, cannot be Pareto efficient, except by chance. Although individuals in our model are rational; markets are not.
ER  -