Belief Heterogeneity and Survival in Incomplete Markets

Tarek Coury () and Emanuela Sciubba

No 613, Birkbeck Working Papers in Economics and Finance from Birkbeck, Department of Economics, Mathematics & Statistics

Abstract: In complete markets economies (Sandroni [15]), or in economies with Pareto optimal outcomes (Blume and Easley [9]), the market selection hypothesis holds, as long as traders have identical discount factors. Traders who survive must have beliefs that merge with the truth. We show that in incomplete markets, regardless of traders’ discount factors, the market selects for a range of beliefs, at least some of which do not merge with the truth. We also show that impatient traders with incorrect beliefs can survive and that these incorrect beliefs impact prices. These beliefs may be chosen so that they are far from the truth.

Keywords: Incomplete markets; market selection hypothesis; belief selection (search for similar items in EconPapers)
JEL-codes: D51 D52 D80 G10 (search for similar items in EconPapers)
Date: 2006-11
New Economics Papers: this item is included in nep-cfn
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

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https://eprints.bbk.ac.uk/id/eprint/26930 First version, 2006 (application/pdf)

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Journal Article: Belief heterogeneity and survival in incomplete markets (2012)
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