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Dr David Goldbaum

Biography

David Goldbaum joined the School at the beginning of 2007. He received his Ph.D. in economics from the University of Wisconsin-Madison in 1996. His research interests include learning, adaptation, financial markets, information, and rational choice. His most recent research examines social network formation and the emergence of leaders as a social phenomenon.

David Goldbaum’s personal webpage and working papers
https://sites.google.com/site/davidhgoldbaum/

Places of Interest

Associate Professor, Economics Discipline Group
Core Member, Centre for the Study of Choice
Core Member, Quantitative Finance Research Centre
Masters of Science (Economics), Doctorate of Philosophy (Economics)
Download CV  (PDF 321 Kb, 6 pages)
Phone
+61 2 9514 7734
Room
CB08.10.94

Research Interests

Computational Economics and Finance, Nonlinear Dynamics, Bounded Rationality and Learning, Agent-based Computational Economics, Applied Micro Theory

Can supervise: Yes

Financial Economics, Financial Investments, Futures and Options, Money and Banking, Intermediate Macroeconomics, Principles Macroeconomics

Chapters

Goldbaum, D. 2001, 'Price bubbles and the long run profitability of a trend following technical trading' in Kirman, A. & Zimmermann, J.B. (eds), Economics with Heterogeneous Interacting Agents, Springer, Germany, pp. 183-194.
Goldbaum, D. 2000, 'Cycles of market stability and instability due to endogenous use of technical trading rules', pp. 481-493.

Conferences

Goldbaum, D. 2011, 'Experiments on the emergence of social order'.
Al-Sharawneh, J.A., Williams, M., Wang, X. & Goldbaum, D. 2011, 'Mitigating Risk in Web-Based Social Network Service Selection: Follow the Leader', The Sixth International Conference on Internet and Web Applications and Services (ICIW 2011), The International Academy, Research and Industry Association (IARIA), IARIA, pp. 156-164.
In the Service Web, a huge number of Web services compete to offer similar functionalities from distributed locations. Since no Web service is risk free, this paper aims to mitigate the risk in service selection using 'Follow the Leader' principle as a new approach for risk-reducing strategy. First, we define the user credibility model based on the 'Follow the Leader' principle in web-based social networks. Next we show how to evaluate the Web service credibility based on its trustworthiness and expertise. Finally, we present a dynamic selection model to select the best service with the perceived performance risk and customer risk-attitude considerations. To demonstrate the feasibility and effectiveness of the new 'Follow the Leader' driven approach to alleviate the risk in service selection, we used a Social Network Analysis Studio (SNAS) to verify the validity of the proposed model. The empirical results incorporated in this paper, demonstrate that our approach is a significantly innovative approach as riskreducing strategy in service selection.
Goldbaum, D. 2010, 'Follow the leader: Steady state analysis of a dynamic social network'.
Goldbaum, D. 2010, 'Learning and adaptation as a source of market failure'.
Goldbaum, D. & Panchenko, V. 2010, 'Learning and adaptation's impact on emergent market efficiency'.
Al-Sharawneh, J., Williams, M.-.A. & Goldbaum, D. 2010, 'Web service reputation prediction based on customer feedback forecasting model', Proceedings - IEEE International Enterprise Distributed Object Computing Workshop, EDOC, pp. 33-40.
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In the Service Web, customers' feedback constitutes a substantial component of Web Service reputation and trustworthiness, which in turn impacts the service uptake by consumers in the future. This paper presents an approach to predict reputation in service-oriented environments. For assessing a Web Service reputation, we define reputation key metrics to aggregate the feedback of different aspects of the ratings. In situations where rating feedback is not available, we propose a Feedback Forecasting Model (FFM), based on Expectation Disconfirmation Theory (EDT), to predict the reputation of a web service in dynamic settings. Then we introduce the concept "Reputation Aspect" and show how to compute it efficiently. Finally we show how to integrate the Feedback Forecasting Model into Aspect-Based Reputation Computation. To demonstrate the feasibility and effectiveness of our approach, we test the proposed model using our Service Selection Simulation Studio (4S). The simulation results included in this paper show the applicability and performance of the proposed Reputation Prediction based on the Customer Feedback Forecasting Model. We also show how our model is efficient, particularly in dynamic environments. 2010 IEEE.
Goldbaum, D. 2009, 'Follow the Leader: Steady State Analysis of a Dynamic Social Network'.
A social pyramid is show to be the unique steady state social structure when agents gain utility from being early adopters of subsequently popular trends. The environment is related to a majority game, but introduces the importance of the timing of adoption. Utility derived from making a popular choice independent of timing is demonstrated as essential to support the hierarchy. The proposed environment is relevant to a number of settings in which leadership and timing of decisions are important or where being perceived as a trend setter is rewarded. The leadership position can be self-reinforcing. For a professional critic, for example, a cult-of personality can dictate popular tastes, such as in art, food, and wine markets. A social hierarchy can also apply to the introduction of new products or ideas including academic research and financial market analysts.
Goldbaum, D. 2008, 'Learning and adaption as a source of market failure'.
Goldbaum, D. 2007, 'Dissemination in an endogenous random network (or "follow the leader")'.
Goldbaum, D. 2007, 'Heterogeneous beliefs in financial markets: Persistent endogenous noise and informationally efficient markets'.
Goldbaum, D. 2007, 'Learning and adaptation as a source of market failure'.
Goldbaum, D. 2007, 'Learning and adaption as a source of market failure'.
Goldbaum, D. 2006, 'Fully revealing prices and other market anomalies'.

Journal articles

Goldbaum, D. & Zwinkels, R.C.J. 2013, 'An empirical examination of heterogeneity and switching in foreign exchange markets', Journal of Economic Behavior and Organization.
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In order to study the expectation formation of financial institutions in the foreign exchange market we develop and apply a recursive selection and estimation algorithm to a dataset of surveyed foreign exchange market expectations. Responses are classified into two groups and forecasting models are endogenously determined within the groups. Estimation results reveal that a fundamentalist-chartist model is capable of explaining a large portion of foreign exchange market expectations. Fundamentalists are found to have mean-reverting expectations whereas chartists have contrarian expectations. Allowing panelists to switch between models significantly improves the fit of the model, especially at the relatively shorter forecast horizons. We find that the fundamentalist model is increasingly used as the forecast horizon extends. Finally, results indicate that model choice is based on a combination of period-specific and individual-specific determinants. 2013 Elsevier B.V. All rights reserved.
Goldbaum, D. & Panchenko, V. 2010, 'Learning and adaptation's impact on market efficiency', Journal of Economic Behavior and Organization, vol. 76, no. 3, pp. 635-653.
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A dynamic model with learning and adaptation captures the evolution in trader beliefs and trading strategies. Through a process of learning and observation, traders improve their understanding of the market. Traders also engage in a process of adaptation by switching between trading strategies based on past performance. The asymptotic properties are derived analytically, demonstrating that convergence to efficiency depends on the model of adaptation. 2010 Elsevier B.V.
Goldbaum, D. 2008, 'Coordinated investing with feedback and learning', Journal of Economic Behavior and Organization, vol. 65, no. 2, pp. 202-223.
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This paper introduces assets for which the intrinsic value is endogenous to the amount of funding attracted. A rational expectations equilibrium is developed. Additionally, simulations of the model based on bounded rationality explore the different market behavior under fundamental and momentum based investing strategies. Both strategies produce herding characteristics. The herding under the fundamental strategy approximates the optimal investing of a rational central planner. The momentum strategy results in suboptimal economic development. 2006 Elsevier B.V. All rights reserved.
Goldbaum, D. & Mizrach, B. 2008, 'Estimating the intensity of choice in a dynamic mutual fund allocation decision', Journal of Economic Dynamics and Control, vol. 32, no. 12, pp. 3866-3876.
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The paper analyzes the intensity of choice in an agent based financial optimization problem. Mean-variance optimizing agents choose among mutual funds of similar styles but varying performance. We specify a model for the allocation of new funds, switching between funds, and withdrawals and obtain statistically significant estimates of the intensity of choice parameter. This estimate is also given economic interpretation through the underperformance of funds that use an active style. We find that agents with relative risk aversion of 2 will move 1% of their funds from active to passive for an extra 34 basis points of return. 2008.
Goldbaum, D. 2006, 'Self-organization and the persistence of noise in financial markets', Journal of Economic Dynamics and Control, vol. 30, no. 9-10, pp. 1837-1855.
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A dynamic model of financial markets with learning is demonstrated to produce a self-organized system that displays critical behavior. The price contains private information that traders learn to extract and employ to forecast future value. Since the price reflects the beliefs of the traders, the learning process is self-referencing. As the market learns to correctly extract information from the price, the market deemphasizes private information. Despite the convergence of the model towards the parameters producing efficiency, pricing deviations remain constant due to the increased sensitivity of the price to small errors in information extraction produced by the model's own convergence. 2006 Elsevier B.V. All rights reserved.
Goldbaum, D. 2005, 'Market efficiency and learning in an endogenously unstable environment', Journal of Economic Dynamics and Control, vol. 29, no. 5, pp. 953-978.
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An informationally inefficiency market is produced without an exogenous source of noise in the price. Fundamental traders acquire private information directly through research. Regression traders employ a learning process to extract the private fundamental information from the public price. The relative popularity between these two strategies evolves based on performance. The model converges towards adoption of regression analysis to the point of creating instability, endogenously producing a noisy price. The lack of a revealing price in the coupled learning and population processes reflects the Grossman and Stiglitz (Amer. Econ. Rev. 70(3)(1980)393) impossibility of informationally efficient markets. 2004 Elsevier B.V. All rights reserved.
Goldbaum, D. 2003, 'Profitable technical trading rules as a source of price instability', Quantitative Finance, vol. 3, no. 3, pp. 220-229.
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This model incorporates technical trading rules (TTRs) that extract information from the price, allowing the users to benefit from the information. Sustainable profits are possible as long as the price movements reflect changes in the security's intrinsic value. The choice to use the TTR rather than fundamental information is endogenous to the model. Increases in the popularity of the TTR can produce price bubbles and diminish the TTR's ability to extract a reliable signal. Large fluctuations in the TTR's popularity lead to unsustainable periods of positive profits coupled with long-term losses.
Goldbaum, D. 2000, 'Life cycle consumption of a harmful and addictive good', Economic Inquiry, vol. 38, no. 3, pp. 458-469.
This article demonstrates that the endogenous desire to quit smoking can result from a rational consumption path chosen at the time the consumer begins smoking. This result is obtained without relying on hidden costs or unknown preferences. A finite-lived agent chooses a path of consumption of a harmful and addictive good to maximize present discounted utility. The consumer chooses his consumption rate to account for the future health consequence of smoking and the withdrawal costs of quitting. A consumer may choose to smoke even if it means a lowered utility level for the majority of the time spent smoking.
Goldbaum, D. 1999, 'A nonparametric examination of market information: Application to technical trading rules', Journal of Empirical Finance, vol. 6, no. 1, pp. 59-85.
This paper develops a nonparametric approach for testing whether an information set is useful for generating greater stock market returns. The approach is model free and thus the test of the information does not depend on the particular assumptions of an asset pricing model. Assuming No Arbitrage, a stochastic discount factor (SDF) is constructed from observed market assets. This SDF can be used as a pricing operator for examining dynamic portfolio returns to indicate the information content in the underlying trading strategy. Trading strategies based on technical trading rules are examined with the developed approach.

Other

Goldbaum, D. 2010, 'Follow the Leader: Network Simulations Examining Conditions for Emergent Social Hierarchies', UTS F&E Working Paper #155.
Goldbaum, D. & Zwinkels, C. 2009, 'An Empirical Examination of Learning in Foreign Exchange Market'.
Goldbaum, D. 2008, 'Follow the Leader: Simulations on a Dynamic Social Network'.
An agent based model is developed in which a social hierarchy of leaders and followers emerges from a uniform or random social network. The formation of the social structure is driven by the desire to be an early adopter of a subsequently popular trend. The environment is related to a majority game, but introduces the importance of the timing of adoption. The proposed environment is relevant to a number of settings in which leadership and timing of decisions are important or being perceived as a trend setter is rewarded. The leadership position can be selfreinforcing. For a professional critic, for example, a cult-of-personality can dictate popular tastes, such as in art, food, and wine markets. A social hierarchy can also apply to the introduction of new products or ideas including academic research and financial market analysts.
Goldbaum, D. & Coate, D. 2006, 'Skills, Effort and Performance in Tournaments: A Dynamic Model and Empirical Analysis', Working Paper Rutgers University #2004-007.
Goldbaum, D., 'A Dynamic Model of Information Selection in Asset Markets'.
Goldbaum, D., 'On the Possibility of Informationally Efficient Markets'.
In a dynamic asset pricing model informed traders receive a noisy signal of the value of a risky asset while uninformed traders learn to extract the information from the price. The relative popularity of the two strategies depends on past performance. An "intensity of choice" parameter is endogenous, reflecting the traders" confidence in selecting the better of the two strategies. The asymptotic properties of the model depend on the evolutionary process for modeling relative popularity. It also depends on how the treatment of the convergence of the model as the popularity of being informed declines towards zero. It is possible to create prices that are arbitrarily close to perfect efficient
Goldbaum, D., 'Market Efficiency and Learning in an Endogenously Unstable Environment'.
\tTraders in this model of an asset market have the opportunity to conduct individual research to acquire a noisy signal of a security's future value, or they can employ least-squares learning in an attempt at extracting the private information of other traders through observing the price. For a fixed proportion of the traders using fundamental research, n, the model converges to a stable fixed point equilibrium. At the fixed point, the regression traders outperform the fundamental traders for all values of n > 0. The equilibrium suffers from a Grossman and Stiglitz (1980) type paradox of efficient markets. Endogenize n based on performance and the Grossman-Stiglitz paradox is alleviated. The model is characterized by an unstable fixed point. As the model converges towards the fixed point, the regression traders perform well. As n falls, the regression traders begin to have a substantial impact on the price, causing greater fluctuations in profits and in n. Inevitably, the actual n is significantly different than the value of n implicit in the regression traders' coefficient values, introducing error in the regression trader's forecast. This leads to substantial mispricing that results in losses to the regression traders. It also throws the model far from the fixed point, starting the convergence process over.
Goldbaum, D., 'Investment and Discovery: Market coordination when investing in projects with endogenous payoffs'.
Goldbaum, D. & Mizrach, B., 'Estimating the Intensity of Choice in a Dynamic Mutual Fund Allocation Decision'.
We estimate the intensity of choice parameter in heterogenous agent models in both a static and dynamic setting. Mean-variance optimizing agents choose among mutual funds of similar styles but varying performance. Actively managed funds have a lower Sharpe ratio than passive index funds, yet they attract a majority share of asset allocation. By estimating the relative growth of passive funds, we obtain a dynamic estimate of the intensity of choice calibrated to 10 years of mutual fund flows
Goldbaum, D., 'Market Efficiency and Learning in an Endogenously Unstable Environment'.
A least-squares model governs the learning process as traders attempt to extract private information from the market price of an asset. Replicator dynamics govern the evolution of the popularity of this strategy against the alternative, directly acquiring the private information through research. The lack of a fixed point to the dual dynamics embodies the Grossman and Stiglitz (1980) impossibility of informationally efficient markets. The asymptotic behavior of the system has the model switching between price stability and instability, endogenously generating noise in the price. The asymptotic behavior is the same when all traders access and employ both fundamental and market information.
Goldbaum, D., 'Coordinated Investing with Feedback and Learning'.
Investors select how to distrubute funds between a number of projects. This paper departs from the standard financial market model by endogenizing the intrinsic value of the assets to be dependend upon the amount of funding they attract. Investment strategies based on fundamental and a momentum strategy are compared. Both strategies produce herding characteristics. For the fundamental strategy herding is optimal. The momentum strategy can result in suboptimal economic development, but can also produces greater success for the individual investors utilizing it.
Goldbaum, D., 'On the Possibility of Informationally Efficient Markets'.
In a dynamic asset pricing model informed traders receive a noisy signal of the value of a risky asset while uninformed traders learn to extract the information from the price. The relative popularity of the two strategies depends on past performance. The asymptotic properties of the model and the possibility of an informationally efficient market depend on whether the population dynamics determine the level of popularity of the strategies or the direction of innovation in popularity. Allowing all traders to access both types of information introduces a stable fixed point, but also a paradox of inconsistency.
Goldbaum, D., 'On the Possibility of Informationally Efficient Markets: Part b'.
A counter example to the Grossman and Stiglitz (1980) finding of the impossibility of informationally efficient markets is produced using discrete choice dynamics to govern the evolution of the trader population that choose between being informed or uninformed based on past performance.