Market Selection Hypothesis; Heterogeneous Beliefs; Incomplete Markets; Asset Pricing; Generalized Kelly rule.

C60, D52, D53, G11, G12

We consider an exchange economy where agents have heterogeneous beliefs and assets are long-lived, and investigate the coupled dynamics of assets prices and agents wealth. We assume that agents hold fixed-mix portfolios and invest on each asset proportionally to its expected dividends. Our main finding is that long-run coexistence of agents with heterogeneous beliefs is a generic outcome of the market selection that leads to assets’ prices en- dogenous fluctuations. By using a direct approach that combines the inter- temporal dynamics of wealth and prices via agents portfolios, we are able to work with both complete and incomplete markets.