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Working Papers

Working Papers

Survival in Speculative Markets. LEM Working Paper 2015/32. SLIDES.
In a stochastic exchange economy where, due to heterogeneity, agents engage in speculative trade, I investigate the Market Selection Hy- pothesis that speculation rewards the agent with the most accurate beliefs. Assuming that markets are complete, I derive sufficient conditions for survival in terms of saving and portfolio decisions and use them to show that the Market Selection Hypothesis fails generically. In particular, when agents have Epstein-Zin preferences, beliefs heterogeneity may persist in the long- run or speculation may cause the agent with the most accurate beliefs to vanish. Failures occur because portfolio average returns are shown to depend not only on accuracy but also on risk preferences, through the comparison with the growth-optimal portfolio. Failures do not occur in bounded CRRA economies because, due to the interdependence of relative risk aversion and intertemporal elasticity of substitution, portfolio returns not related to accuracy are compensated by the component of saving that responds to uncertainty.

Long-run Heterogeneity in an Exchange Economy with Fixed-Mix Traders, with Giulio Bottazzi and Daniele Giachini. LEM Working Paper 2015/29.
We consider an exchange economy with heterogeneous agents and multiple assets and investigate the coupled dynamics of prices and wealth. We assume that agents have heterogeneous beliefs and invest on each asset a fraction of wealth proportional to its expected dividends. Our main finding is that long-run coexistence of heterogeneous agents is a generic outcome of the market dynamics. We provide sufficient conditions for the latter, as well as sufficient conditions for the relative wealth of any given agent converging to zero or to one. Since we use a direct approach that combines the inter-temporal dynamics of wealth and prices via portfolio rules, we can characterize when long-run heterogeneity occurs for both complete and incomplete asset markets.

Drift criteria for persistence of discrete stochastic processes on the line, with Giulio Bottazzi. LEM Working Paper 2015/26.
We provide sufficient conditions for the persistence or transience of stochastic processes on the line based on the sign of the conditional drift. Our findings extend previous results in the literature to the large class of discrete time processes with bounded increments.

Work in Progress

The Wisdom of the Crowd Revisited, with Filippo Massari
The 'wisdom of the crowd' states that asset prices, by reflecting aggre- gate information, may be more accurate than individual beliefs. However, a market selection argument implies that the trader with the most accu- rate beliefs gains all the wealth in the long-run, so that only his beliefs are eventually reflected in asset prices. In this paper we show how to reconcile these two alternative points of view. We study an Arrow-Debreu exchange economy with complete markets where traders have heterogeneous beliefs. We assume that beliefs are made by a combination of trader-specific id- iosyncratic beliefs and the reference point given by the probabilities implicit in asset equilibrium prices. We show that, provided agents idiosyncratic beliefs are sufficiently diversified and the weight on the reference point is large enough, a wisdom of the effect holds. Asset prices are more accurate than individual idiosyncratic beliefs, and more accurate than they would be if traders did not use prices to form their beliefs.

A Model of Market Sentiment, with Giulio Bottazzi e Daniele Giachini

Generalized Kelly Rules, with Giulio Bottazzi

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