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Aggregation of heterogeneous beliefs

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  • Jouini, E.
  • Napp, C.

Abstract

This paper is a generalization of Calvet et al. (2002) to a dynamic setting. We propose a method to aggregate heterogeneous individual probability beliefs, in dynamic and complete asset markets, into a single consensus probability belief. This consensus probability belief, if commonly shared by all investors, generates the same equilibrium prices as well as the same individual marginal valuation as in the original heterogeneous probability beliefs setting. As in Calvet et al. (2002), the construction stands on a fictitious adjustment of the market portfolio. The adjustment process reflects the aggregation bias due to the diversity of beliefs. In this setting, the construction of a representative agent is shown to be also valid.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Mathematical Economics.

Volume (Year): 42 (2006)
Issue (Month): 6 (September)
Pages: 752-770

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Handle: RePEc:eee:mateco:v:42:y:2006:i:6:p:752-770

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References

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  1. Laurent Calvet & Jean-Michel Grandmont & Isabelle Lemaire, 2001. "Aggregation of Heterogenous Beliefs and Asset Pricing in Complete Financial Markets," Working Papers 2001-01, Centre de Recherche en Economie et Statistique.
  2. Rubinstein, Mark, 1976. "The Strong Case for the Generalized Logarithmic Utility Model as the Premier Model of Financial Markets," Journal of Finance, American Finance Association, vol. 31(2), pages 551-71, May.
  3. Rubinstein, Mark, 1974. "An aggregation theorem for securities markets," Journal of Financial Economics, Elsevier, vol. 1(3), pages 225-244, September.
  4. Zapatero, Fernando, 1998. "Effects of financial innovations on market volatility when beliefs are heterogeneous," Journal of Economic Dynamics and Control, Elsevier, vol. 22(4), pages 597-626, April.
  5. Clotilde Napp & Elyès Jouini, 2007. "Consensus consumer and intertemporal asset pricing with heterogeneous beliefs," Post-Print halshs-00152348, HAL.
  6. Basak, Suleyman & Cuoco, Domenico, 1998. "An Equilibrium Model with Restricted Stock Market Participation," Review of Financial Studies, Society for Financial Studies, vol. 11(2), pages 309-41.
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Citations

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Cited by:
  1. He, Xue-Zhong & Treich, Nicolas, 2012. "Heterogeneous Beliefs and Prediction Market Accuracy," TSE Working Papers 13-394, Toulouse School of Economics (TSE).
  2. Amos Storkey, 2011. "Machine Learning Markets," Papers 1106.4509, arXiv.org.
  3. Christian Gollier, 2007. "Whom should we believe? Aggregation of heterogeneous beliefs," Journal of Risk and Uncertainty, Springer, vol. 35(2), pages 107-127, October.
  4. Min Shen & Gabriel Turinici, 2012. "Liquidity generated by heterogeneous beliefs and costly estimations," Post-Print hal-00638966, HAL.
  5. Costas Xiouros, 2006. "Asset price volatilities and trading volumes in heterogeneous agent economies," Computing in Economics and Finance 2006 466, Society for Computational Economics.

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