Speculation and Financial Wealth Distribution Under Belief Heterogeneity

Speculation and Financial Wealth Distribution under Belief Heterogeneity∗

Under limited commitment that prevents agents from pledging their future nonfinancial wealth, agents with incorrect beliefs always survive by holding on their nonfinancial wealth. Friedman (1953)’s market selection hypothesis suggests that their financial wealth trends towards zero in the long run. However, in this paper, I construct an example in dynamic general equilibrium in which over-optim...

Wealth Distribution under Idiosyncratic Investment Risk

I investigate the mechanisms through which idiosyncratic investment risk generates a fat tail of the wealth distribution. I set up a continuous time OLG model with a bequest motive and portfolio selection to show that idiosyncratic investment risk generates a Pareto tail in the wealth distribution. I calibrate my model to the U.S. economy and show that the wealth distribution in the simulated e...

Heterogeneity, Selection and Wealth Dynamics

The market selection hypothesis states that, among expected utility maximizers, competitive markets select for agents with correct beliefs. In some economies this hypothesis holds, while in others it fails. It holds in complete market economies with a common discount factor and bounded aggregate consumption. It can fail when markets are incomplete, when consumption grows too quickly, or when di...

Food price volatility and financial speculation

Speculation and survival in financial markets∗

The paper analyzes a finite time economy with a single risky asset which pays a one-shot payoff (dividend). The payoff is random and its distribution is not known à priori. Agents observe public signals (random draws from the same distribution) and update their beliefs about the payoff. They trade in order to reshuffle their portfolios according to new beliefs. Agents may use various updating r...