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The evolution of security designs

Abstract:

This paper embeds security design in a model of evolutionary learning. We consider a competitive and perfect financial market where agents, as in Allen and Gale (1988), have heterogeneous valuations for cash flows. Our point of departure is that, instead of assuming that agents are endowed with rational expectations, we model their behavior as the product of adaptive learning. Our results demonstrate that adaptive learning profoundly affects security design. Securities are mispriced even in t...

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Publication date:
2007-01-01
UUID:
uuid:a827c0ee-6245-46a7-9e91-698adb2c01b4
Local pid:
oai:eureka.sbs.ox.ac.uk:1107
Deposit date:
2011-11-08

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