Market Selection in Large Economies: A Matter of Luck

43 Pages Posted: 4 Feb 2015 Last revised: 4 Oct 2018

See all articles by Filippo Massari

Filippo Massari

UNSW Business School; Financial Research Network (FIRN)

Date Written: April 23, 2018

Abstract

In a general equilibrium model with a continuum of traders and bounded aggregate endowment, I investigate the Market Selection Hypothesis that markets favor traders with accurate beliefs. Contrary to known results for economies with (only) finitely many traders, I find that risk attitudes affect traders' survival and that markets can favor ``lucky'' traders with incorrect beliefs over ''skilled'' traders with accurate beliefs. My model allows for a clear distinction between luck and skills and it shows that market selection forces induce efficient prices even when accurate traders do not survive in the long run.

Keywords: market selection hypothesis, asset pricing, De-Finetti's theorem

JEL Classification: D50, D90, G12

Suggested Citation

Massari, Filippo, Market Selection in Large Economies: A Matter of Luck (April 23, 2018). Available at SSRN: https://ssrn.com/abstract=2559468 or http://dx.doi.org/10.2139/ssrn.2559468

Filippo Massari (Contact Author)

UNSW Business School ( email )

UNSW Business School
High St
Sydney, NSW 2052
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

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