Chapter

Market Efficiency, the Pareto Wealth Distribution, and the Lévy Distribution of Stock Returns

Moshe Levy

in The Economy as an Evolving Complex System, III

Published in print October 2005 | ISBN: 9780195162592
Published online October 2011 | e-ISBN: 9780199850495 | DOI: http://dx.doi.org/10.1093/acprof:oso/9780195162592.003.0006

Series: Santa Fe Institute Studies on the Sciences of Complexity

Market Efficiency, the Pareto Wealth Distribution, and the Lévy Distribution of Stock Returns

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The Pareto (power-law) wealth distribution is a robust consequence of a fundamental property of the capital investment process: it is a stochastic multiplicative process. This distribution implies that inequality is driven primarily by chance, rather than by differential investment ability. This chapter shows that the Pareto wealth distribution may explain the Levy distribution of stock returns, which has puzzled researchers for many years. Thus, the Pareto wealth distribution, market efficiency, and the Levy distribution of stock returns are all closely linked.

Keywords: Pareto wealth distribution; power-law; capital; investment; inequality; Levy distribution; stock

Chapter.  11254 words.  Illustrated.

Subjects: Economic Systems

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