Handbook of Financial Markets: Dynamics and Evolution

Chapter 7. Market Selection and Asset Pricing

1. Introduction 405
   1. Evolution in Biology and Economics 405
   2. A Short History of the Market Selection Hypothesis 407
   3. Scope of This Chapter 409
2. The Economy 411
   1. Traders 411
   2. Beliefs 412
3. Equilibrium Allocations and Prices 413
   1. Pareto Optimality 413
   2. Competitive Equilibrium 414
4. Selection 416
   1. Literature 416
   2. A Leading Example 416
   3. Selection in Complete IID Markets 419
   4. The Basic Equations 420
   5. Who Survives? Necessity 421
   6. Selection and Market Equilibrium 421
   7. More General Stochastic Processes 422
5. Multiple Survivors 423
   1. Who Survives? Sufficiency 423
6. The Life and Death of Noise Traders 426
   1. The Importance of Market Structure 426
   2. Laws of Large Numbers 428Note: The authors are grateful to the NYU Department of Economics ...