Theoretical Economics 14 (2019), 437–473

In a general equilibrium model with a continuum of traders and bounded aggregate endowment, I investigate the Market Selection Hypothesis that markets favor traders with accurate beliefs. Contrary to known results for economies with (only) finitely many traders, I find that risk attitudes affect traders' survival and that markets can favor "lucky" traders with incorrect beliefs over "skilled" traders with accurate beliefs. My model allows for a clear distinction between luck and skills and it shows that market selection forces induce efficient prices even when accurate traders do not survive in the long run.

Keywords: Market selection hypothesis, asset pricing, general equilibrium

JEL classification: D50,D90, G12