The Inefficient Markets Hypothesis: Why Financial Markets Do Not Work Well in the Real World
type: Dataset
description: 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.
landing page: https://shs.hal.science/halshs-00796672
keyword: excess-volatility
keyword: extrinsic-uncertainty
keyword: heterogeneous-agents
keyword: inefficient-markets
keyword: infoeu-reposemanticspreprint
keyword: overlapping-generations
keyword: preprints-working-papers-
keyword: shsecohumanities-and-social-scienceseconomics-and-finance
keyword: sunspots
issued: 2026-05-13T16:56:07.995286
modified: 2026-05-13T16:56:07.995293
language: en
contact point: Organization
  fn: CCSD

test_moissonnage_selune
type: Agent

The Inefficient Markets Hypothesis: Why Financial Markets Do Not Work Well in the Real World
type: Distribution
format: HTML
access URL: https://shs.hal.science/halshs-00796672
issued: 2026-05-13T16:56:08.001260
modified: 2026-05-13T16:56:07.965393