The Price Impact and Survival of Irrational Traders

Leonid Kogan and Stephen Ross

No 35, 2004 Meeting Papers from Society for Economic Dynamics

Abstract: Milton Friedman argued that irrational traders will consistently lose money, won't survive and, therefore, cannot influence long run equilibrium asset prices. Since his work, survival and price influence have been assumed to be the same. Often partial equilibrium analysis has been relied upon to examine the survival of irrational traders and to make inferences on their influence on prices. In this paper, we demonstrate that survival and influence on prices are two independent concepts. The price impact of irrational traders does not rely on their long-run survival and they can have a significant impact on asset prices even when their wealth becomes negligible. In addition, in contrast to a partial equilibrium analysis, general equilibrium considerations matter since the ability of irrational traders to impact prices even when their wealth is diminishing can significantly affect their chances for long-run survival. In sum, in a long-run equilibrium, we explicitly show that price impact can occur whether or not the irrational traders survive. In related work, we show that even if the irrational traders survive they may have no price impact

Keywords: asset pricing; behavioral finance; price impact; survival; heterogeneity (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Date: 2004
New Economics Papers: this item is included in nep-dge
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://web.mit.edu/lkogan2/www/KRWW2002.pdf main text (application/pdf)

Related works:
Journal Article: The Price Impact and Survival of Irrational Traders (2006)
Working Paper: Price Impact and Survival of Irrational Traders (2004)
Working Paper: The Price Impact and Survival of Irrational Traders (2003)
Working Paper: The Price Impact and Survival of Irrational Traders (2003)
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:red:sed004:35

Access Statistics for this paper

More papers in 2004 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann ().