TY  - BOOK
AU  - Kogan,Leonid
AU  - Ross,Stephen
AU  - Wang,Jiang
AU  - Westerfield,Mark M.
ED  - National Bureau of Economic Research.
TI  - Market Selection
T2  - NBER working paper series
PY  - 2009///
CY  - Cambridge, Mass.
PB  - National Bureau of Economic Research
N1  - July 2009; Hardcopy version available to institutional subscribers
N2  - The hypothesis that financial markets punish traders who make relatively inaccurate forecasts and eventually eliminate the effect of their beliefs on prices is of fundamental importance to the standard modeling paradigm in asset pricing. We establish necessary and sufficient conditions for agents making inferior forecasts to survive and to affect prices in the long run in a general setting with minimal restrictions on endowments, beliefs, or utility functions. We show that the market selection hypothesis is valid for economies with bounded endowments or bounded relative risk aversion, but it cannot be substantially generalized to a broader class of models. Instead, survival is determined by a comparison of the forecast errors to risk attitudes. The price impact of inaccurate forecasts is distinct from survival because price impact is determined by the volatility of traders' consumption shares rather than by their level. Our results also apply to economies with state-dependent preferences, such as habit formation
UR  - https://www.nber.org/papers/w15189
UR  - http://dx.doi.org/10.3386/w15189
ER  -