Long-run heterogeneity in an exchange economy with fixed-mix traders

Giulio Bottazzi, Pietro Dindo and Daniele Giachini
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Daniele Giachini: Scuola Superiore Sant’Anna

Economic Theory, 2018, vol. 66, issue 2, No 6, 407-447

Abstract: Abstract We consider an exchange economy where agents have heterogeneous beliefs and assets are long-lived, and investigate the coupled dynamics of asset prices and agents’ wealth. We assume that agents hold fixed-mix portfolios and invest on each asset proportionally to its expected dividends. We prove the existence and uniqueness of a sequence of arbitrage-free market equilibrium prices and provide sufficient conditions for an agent, or a group of agents, to survive or dominate. Our main finding is that long-run coexistence of agents with heterogeneous beliefs, leading to asset prices endogenous fluctuations, is a generic outcome of the market selection process.

Keywords: Market selection hypothesis; Heterogeneous beliefs; Asset pricing; Evolutionary finance; Incomplete markets (search for similar items in EconPapers)
JEL-codes: C60 D52 D53 G11 G12 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (22)

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Working Paper: Long-run Heterogeneity in an Exchange Economy with Fixed-Mix Traders (2015)
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DOI: 10.1007/s00199-017-1066-8

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