Market Selection

Leonid Kogan, Stephen Ross, Jiang Wang and Mark Westerfield ()

No 15189, NBER Working Papers from National Bureau of Economic Research, Inc

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 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 show that the market selection hypothesis is valid for economies with bounded endowments or bounded relative risk aversion, but it cannot be substantially generalized to a broader class of models. Instead, survival is determined by a comparison of the forecast errors to risk attitudes. The price impact of inaccurate forecasts is distinct from survival because price impact is determined by the volatility of traders' consumption shares rather than by their level. Our results also apply to economies with state-dependent preferences, such as habit formation.

JEL-codes: D51 D53 G1 G11 G12 G14 (search for similar items in EconPapers)
Date: 2009-07
New Economics Papers: this item is included in nep-upt
Note: AP
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

Published as Kogan, Leonid & Ross, Stephen A. & Wang, Jiang & Westerfield, Mark M., 2017. "Market selection," Journal of Economic Theory, Elsevier, vol. 168(C), pages 209-236.

Downloads: (external link)
http://www.nber.org/papers/w15189.pdf (application/pdf)

Related works:
Journal Article: Market selection (2017)
Working Paper: Market Selection (2009)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:15189

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w15189

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().