Speculation; Heterogeneous Beliefs; Market Selection Hypothesis; Asset Pricing; Log-optimality; Epstein-Zin Preferences, Saving under Uncertainty

D53, D01, G12, G14, G11, E21

In a stochastic exchange economy where, due to beliefs’ 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 agents’ 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 agents’ portfolio average returns are shown to depend not only on beliefs’ 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 beliefs’ accuracy are compensated by the component of saving that responds to uncertainty.