Market power, survival and accuracy of predictions in financial markets |
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Authors: | Patrick Leoni |
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Institution: | (1) Department of Economics, National University of Ireland at Maynooth, Maynooth, Kildare, Ireland |
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Abstract: | In a standard General Equilibrium framework, we consider an agent strategically using her large volume of trade to influence
asset prices to increase her consumption. We show that, as in Sandroni (Econometrica 68:1303–1341, 2000) for the competitive
case, if markets are dynamically complete and some general conditions on market preferences are met then this agent’ long-run
consumption will vanish if she makes less accurate predictions than the market, and will maintain her market power otherwise.
We thus argue that the Market Selection Hypothesis extends to this situation of market power, in contrast to Alchian (J Pol
Econ 58:211–221, 1950) and Friedman (Essays in Positive Economics, University of Chicago Press, Chicago, 1953) who claimed
that this selection was solely driven by the competitiveness of markets.
I would like to thank T. Hens, A. Kirman and A. Sandroni for many stimulating conversations and encouragements. Two anonymous
referees also provided very valuable comments. |
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Keywords: | Market selection hypothesis Market power Survival Asset pricing |
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