Market Selection in Large Economies: A Matter of Luck
43 Pages Posted: 4 Feb 2015 Last revised: 4 Oct 2018
Date Written: April 23, 2018
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: Suggested Citation