Market Power, Survival and Accuracy of Predictions in Financial Markets

Patrick Leoni ()

No 216, IEW - Working Papers from Institute for Empirical Research in Economics - University of Zurich

Abstract: This paper aims to show that the market selection hypothesis in finance is not solely driven by the competitiveness of such markets, as was originally claimed by Alchian [1] and Friedman [4]. Within a standard intertemporal General Equilibrium framework, we allow for an agent to have enough influence on financial markets to strategically affect prices of assets traded. We then show that, as in Sandroni [15], the agent� long-run consumption will vanish if she makes less accurate predictions than the market, and maintain her market power otherwise. We conclude that the Darwinian justification to this market selection is not the only explanation for the eventual domination of agents making the most accurate predictions. Rather, we claim that the origin of market selection, and in turn of the common prior assumption in asset pricing, is associated with the ability to foresee accurately market uncertainty.

Keywords: market imperfection; asset pricing; learning (search for similar items in EconPapers)
JEL-codes: D43 G11 G12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fin, nep-fmk and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Related works:
Journal Article: Market power, survival and accuracy of predictions in financial markets (2008)
Working Paper: Market Power, Survival and Accuracy of Predictions in Financial Markets (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:zur:iewwpx:216

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