On the limits of informationally efficient stock markets: New insights from a chartist-fundamentalist model

Abstract

We utilize a chartist-fundamentalist model to examine the limits of informationally efficient stock markets. In our model, chartists are permanently active in the stock market, while fundamentalists trade only when their mispricing-dependent trading signals are strong. Our findings indicate the possible coexistence of two distinct regimes. Depending on the initial conditions, the stock market may exhibit either constant or oscillatory mispricing. Constant mispricing occurs when chartists remain the sole active speculators, causing the stock price to converge toward a nonfundamental value. Conversely, the stock price oscillates around its fundamental value when fundamentalists repeatedly enter and exit the market. Exogenous shocks result in intricate regime-switching dynamics.