The Adaptive Markets Hypothesis by Lo, Andrew W.; Zhang, Ruixun;

An Evolutionary Approach to Understanding Financial System Dynamics

Series: Clarendon Lectures in Finance;

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Product details:

Publisher OUP Oxford
Date of Publication 22 February 2024

ISBN 9780199681143
Binding Hardback
No. of pages800 pages
Size 241x166x36 mm
Weight 1342 g
Language English

Short description:

The Adaptive Markets Hypothesis is a formal and systematic exposition. Lo and Zhang develop the mathematical foundations of the simple yet powerful evolutionary model and show that the most fundamental economic behaviours that we take for granted emerge solely through natural selection.

Long description:

The Adaptive Markets Hypothesis (AMH) presents a formal and systematic exposition of a new narrative about financial markets that reconciles rational investor behaviour with periods of temporary financial insanity. In this narrative, intelligent but fallible investors learn from and adapt to randomly shifting environments. Financial markets may not always be efficient, but they are highly competitive, innovative, and adaptive, varying in their degree of efficiency as investor populations and the financial landscape change over time.

Andrew Lo and Ruixun Zhang develop the mathematical foundations of the AMH--a simple yet surprisingly powerful set of evolutionary models of behaviour--and then apply these foundations to show how the most fundamental economic behaviours that we take for granted can arise solely through natural selection. Drawing on recent advances in cognitive neuroscience and artificial intelligence, the book also explores how our brain affects economic and financial decision making.

The AMH can be applied in many contexts, ranging from designing trading strategies, to managing risk and understanding financial crises, to formulating macroprudential policies to promote financial stability. This volume is a must read for anyone who has ever been puzzled and concerned by the behaviour of financial markets and the implications for their personal wealth, and seeks to learn how best to respond to such behaviour.

Presents a new narrative capable of reconciling rational behavior with periods of temporary financial insanity, highlighting a formal and systematicexposition of the theory of adaptive markets and its many applications.

Introduction and Roadmap
The Origin of Behaviour
Mutation
Group Selection
Probability Matching
Risk Aversion
Cooperation
Bounded Rationality and Intelligence
Learning to be Bayesian
The Madness of Mobs
Fear, Greed, and Financial Crises
The Psychophysiology of Trading
What Makes a Good Day Trader?
A Computational View of Market Efficiency
Maximizing Relative vs. Absolute Wealth
Hedge Funds: The Galápagos Islands of Finance
What Happened to the Quants in August 2007?
Co-Evolution of Financial Markets and Technology
The Role of Culture in Finance
Regulation and Adaptive Markets