ABSTRACT

The theory of modern capital and risk markets has spawned a lively and highly informative investigation of the Perfectly Efficient Market. It could be any financial market, either a market for financial assets or a market for risk positions. We need more tools, and toward this end, this chapter proposes the Perfectly Inefficient Market hypothesis. A market is perfectly inefficient when there is only trading noise: when the flow of arriving information has no correlation with price at all. There is a component of price which is generally accepted to be uninformative and that is the bid-ask spread. A non-economic agent is simply an entity that trades in the market for reasons unrelated to profit. Leveraged speculators take position that, if they go wrong, can consume all the agent's capital in a very short time. The chapter focuses on a hypothetical market maker who is attempting to accommodate the asynchronous flow.