Market Selection

Leonid Kogan, Stephen A. Ross, Jiang Wang, and Mark M. Westerfield
Journal of Economic Theory 2017, 168: 209-236

[PDF] [Journal Version] [SSRN Version]

Summary

We establish straightforward necessary and sufficient conditions for agents making inferior forecasts to survive and to affect prices in a general setting with minimal restrictions on endowments, beliefs, or utility functions.

Abstract

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 straightforward necessary and sufficient conditions for agents to survive and to affect prices in the long run in a general setting with minimal restrictions on endowments, beliefs, or utility functions. We describe a new mechanism for the distinction between survival and price impact in a broad class of economies. Our results cover economies with time-separable utility functions, including possibly state-dependent preferences.

Cite as

Kogan, Leonid, Stephen A. Ross, Jiang Wang, and Mark M. Westerfield. 2017. “Market Selection.” Journal of Economic Theory 168: 209–236. https://doi.org/10.1016/j.jet.2016.12.002

BibTeX

@article{KoganRossWangWesterfield2017,
  author  = {Kogan, Leonid and Ross, Stephen A. and Wang, Jiang and Westerfield, Mark M.},
  title   = {Market Selection},
  journal = {Journal of Economic Theory},
  year    = {2017},
  volume  = {168},
  pages   = {209--236},
  doi     = {10.1016/j.jet.2016.12.002},
  url     = {https://doi.org/10.1016/j.jet.2016.12.002}
}

The PDF posted here is the authors’ manuscript (November 2016 draft). The version of record is available from the journal at the DOI above. Updated October 5, 2026.