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Market Power, Survival and Accuracy of Predictions in Financial Markets


Leoni, Patrick (2004). Market Power, Survival and Accuracy of Predictions in Financial Markets. Working paper series / Institute for Empirical Research in Economics No. 216, University of Zurich.

Abstract

"This paper aims to show that the market selection hypothesis in finance is not solely driven by the competitiveness of such markets, as was originally claimed by Alchian [1] and Friedman [4]. Within a standard intertemporal General Equilibrium framework, we allow for an agentnto have enough influence on financial markets to strategically affect prices of assets traded. We then show that, as in Sandroni [15], the agent’ long-run consumption will vanish if she makes less accurate predictions than the market, and maintain her market power otherwise. We conclude thatnthe Darwinian justification to this market selection is not the only explanation for the eventualndomination of agents making the most accurate predictions. Rather, we claim that the origin of market selection, and in turn of the common prior assumption in asset pricing, is associated withnthe ability to foresee accurately market uncertainty."

Abstract

"This paper aims to show that the market selection hypothesis in finance is not solely driven by the competitiveness of such markets, as was originally claimed by Alchian [1] and Friedman [4]. Within a standard intertemporal General Equilibrium framework, we allow for an agentnto have enough influence on financial markets to strategically affect prices of assets traded. We then show that, as in Sandroni [15], the agent’ long-run consumption will vanish if she makes less accurate predictions than the market, and maintain her market power otherwise. We conclude thatnthe Darwinian justification to this market selection is not the only explanation for the eventualndomination of agents making the most accurate predictions. Rather, we claim that the origin of market selection, and in turn of the common prior assumption in asset pricing, is associated withnthe ability to foresee accurately market uncertainty."

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Economics
Working Paper Series > Institute for Empirical Research in Economics (former)
Dewey Decimal Classification:330 Economics
Language:English
Date:December 2004
Deposited On:29 Nov 2011 22:32
Last Modified:12 Aug 2017 12:56
Series Name:Working paper series / Institute for Empirical Research in Economics
ISSN:1424-0459
Official URL:http://www.econ.uzh.ch/wp.html

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