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Market power, survival and accuracy of predictions in financial markets

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  • Patrick Leoni

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 (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 (1950) and Friedman (1953) who claimed that this selection was solely driven by the competitiveness of markets.
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  • Patrick Leoni, 2008. "Market power, survival and accuracy of predictions in financial markets," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 34(1), pages 189-206, January.
    • Handle: RePEc:spr:joecth:v:34:y:2008:i:1:p:189-206
    DOI: 10.1007/s00199-007-0203-1
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    Cited by:

    1. Fehr, Ernst & Fischbacher, Urs & Kosfeld, Michael, 2005. "Neuroeconomic Foundations of Trust and Social Preferences," IZA Discussion Papers 1641, Institute of Labor Economics (IZA).
    2. Leoni, Patrick L., 2013. "Survival in Cournot games," Journal of Mathematical Economics, Elsevier, vol. 49(5), pages 429-434.
    3. Patrick Leoni, 2012. "Rational expectations and monopolistic trades," Journal of Economics, Springer, vol. 107(2), pages 129-140, October.
    4. Armin Falk & Ernst Fehr & Christian Zehnder, "undated". "The Behavioral Effects of Minimum Wages," IEW - Working Papers 247, Institute for Empirical Research in Economics - University of Zurich.
    5. Tania Singer & Ernst Fehr, 2005. "The Neuroeconomics of Mind Reading and Empathy," American Economic Review, American Economic Association, vol. 95(2), pages 340-345, May.
    6. Filippo Massari, 2021. "Price probabilities: a class of Bayesian and non-Bayesian prediction rules," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 72(1), pages 133-166, July.

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    More about this item

    Keywords

    Market selection hypothesis; Market power; Survival; Asset pricing; G11; G14;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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