Market selection in large economies: a matter of luck

Filippo Massari

Theoretical Economics, 2019, vol. 14, issue 2

Abstract: 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; general equilibrium (search for similar items in EconPapers)
JEL-codes: D50 D90 G12 (search for similar items in EconPapers)
Date: 2019-05-28
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Citations: View citations in EconPapers (8)

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