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An Examination of Heterogeneous Beliefs with a Short-Sale Constraint in a Dynamic Economy

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  • Michael Gallmeyer
  • Burton Hollifield

Abstract

We study the effects of a market-wide short-sale constraint in a dynamic economy with heterogeneous beliefs. Imposing the constraint reduces the stock price if the optimistic investors' intertemporal elasticity of substitution (IES) is less than one and increases the stock price if the optimist's IES is greater than one. In calibrated examples, the optimist's market price of risk falls and the interest rate rises when the constraint binds. Imposing the constraint leads to a higher stock volatility if the optimist's IES is less than one and a lower stock volatility if the IES is greater than one. Copyright 2008, Oxford University Press.

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File URL: http://hdl.handle.net/10.1093/rof/rfm036
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Bibliographic Info

Article provided by European Finance Association in its journal Review of Finance.

Volume (Year): 12 (2008)
Issue (Month): 2 ()
Pages: 323-364

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Handle: RePEc:oup:revfin:v:12:y:2008:i:2:p:323-364

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Cited by:
  1. Georgy Chabakauri, 2012. "Asset Pricing with Heterogeneous Investors and Portfolio Constraints," FMG Discussion Papers dp707, Financial Markets Group.
  2. A. A. Brown & L. C. G. Rogers, 2009. "Heterogeneous Beliefs with Finite-Lived Agents," Papers 0907.4953, arXiv.org.
  3. Angus A Brown & L C G Rogers, 2010. "Diverse Beliefs," Papers 1001.1450, arXiv.org.
  4. Boehmer, Ekkehart & Huszar, Zsuzsa R. & Jordan, Bradford D., 2010. "The good news in short interest," Journal of Financial Economics, Elsevier, vol. 96(1), pages 80-97, April.
  5. Ngoc-Khanh Tran & Richard J. Zeckhauser, 2011. "The Behavior of Savings and Asset Prices When Preferences and Beliefs are Heterogeneous," NBER Working Papers 17199, National Bureau of Economic Research, Inc.
  6. Eric Aldrich, 2012. "Trading Volume in General Equilibrium with Complete Markets," 2012 Meeting Papers 36, Society for Economic Dynamics.
  7. Mikhail Anufriev & Jan Tuinstra, 2013. "The Impact of Short-Selling Constraints on Financial Market Stability in a Heterogeneous Agents Model," Working Paper Series 3, Economics Discipline Group, UTS Business School, University of Technology, Sydney.
  8. Bakshi, Gurdip & Madan, Dilip & Panayotov, George, 2010. "Returns of claims on the upside and the viability of U-shaped pricing kernels," Journal of Financial Economics, Elsevier, vol. 97(1), pages 130-154, July.
  9. Kristoffer Nimark, 2012. "Speculative Dynamics in the Term Structure of Interest Rates," Working Papers 430, Barcelona Graduate School of Economics.
  10. Lim, Bryan Y., 2011. "Short-sale constraints and price bubbles," Journal of Banking & Finance, Elsevier, vol. 35(9), pages 2443-2453, September.
  11. Min Shen & Gabriel Turinici, 2012. "Liquidity generated by heterogeneous beliefs and costly estimations," Post-Print hal-00638966, HAL.

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