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Journal Article

Adaptive Learning in Financial Markets

Bryan R. Routledge
The Review of Financial Studies
Vol. 12, No. 5 (Winter, 1999), pp. 1165-1202
Stable URL: http://www.jstor.org/stable/2645979
Page Count: 38
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Adaptive Learning in Financial Markets
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Abstract

We investigate adaptive or evolutionary learning in a repeated version of the Grossman and Stiglitz (1980) model. We demonstrate that any process that is a monotonic selection dynamic will converge to the rational expectations asset demands if the proportion of informed traders is fixed. We also show that these learning processes have a unique asymptotically stable fixed point at the Grossman-Stiglitz (GS) equilibrium. The robustness of learning to noisy experimentation is studied using Binmore and Samuelson's (1999) deterministic drift approximation. Conditions on economic and learning process parameters for adaptive learning to lead to the GS rational expectations equilibrium are presented.

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