Abstract

http://ssrn.com/abstract=1108682
 
 

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Market Selection


Leonid Kogan


Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Stephen A. Ross


Massachusetts Institute of Technology (MIT) - Sloan School of Management; Yale University - International Center for Finance

Jiang Wang


MIT; China Academy of Financial Research (CAFR); National Bureau of Economic Research (NBER)

Mark M. Westerfield


University of Washington

August 2011

AFA 2009 San Francisco Meetings Paper

Abstract:     
The hypothesis that financial markets punish traders who make relatively inaccurate forecasts and eventually eliminate the effect of their beliefs on prices is of fundamental importance to the standard modeling paradigm in asset pricing. We establish straightforward necessary and sufficient conditions for agents making inferior forecasts to survive and to affect prices in the long run in a general setting with minimal restrictions on endowments, beliefs, or utility functions. We describe a new mechanism for the distinction between survival and price impact in a broad class of economies. Our results cover economies with time-separable utility functions, including possibly state-dependent preferences, such as external habit formation.

Number of Pages in PDF File: 47

Keywords: Market Selection, Heterogeneous Beliefs, State-Dependent Utility, Survival, Price Impact

JEL Classification: G0, G14, D51

working papers series





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Date posted: March 25, 2008 ; Last revised: September 16, 2011

Suggested Citation

Kogan, Leonid and Ross, Stephen A. and Wang, Jiang and Westerfield, Mark M., Market Selection (August 2011). AFA 2009 San Francisco Meetings Paper. Available at SSRN: http://ssrn.com/abstract=1108682 or http://dx.doi.org/10.2139/ssrn.1108682

Contact Information

Leonid Kogan
Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )
50 Memorial Drive
Cambridge, MA 02142
United States
617-253-2289 (Phone)
617-258-6855 (Fax)
HOME PAGE: http://web.mit.edu/lkogan2/www/
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Stephen A. Ross
Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )
77 Massachusetts Ave.
E62-416
Cambridge, MA 02142
United States
203-432-6015 (Phone)
203-432-8931 (Fax)
Yale University - International Center for Finance
Box 208200
New Haven, CT 06520-8200
United States
Jiang Wang
MIT ( email )
E62-614
100 Main Street
Cambridge, MA 02142
United States
617-253-2632 (Phone)
617-258-6855 (Fax)
China Academy of Financial Research (CAFR)
1954 Huashan Road
Shanghai P.R.China, 200030
China

National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Mark M. Westerfield (Contact Author)
University of Washington ( email )
Box 353200
Seattle, WA 98195
United States
HOME PAGE: http://www.markwesterfield.com
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References:  46
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