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Heterogeneous Beliefs with Finite-Lived Agents

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  • A. A. Brown
  • L. C. G. Rogers

Abstract

This paper will examine a model with many agents, each of whom has a different belief about the dynamics of a risky asset. The agents are Bayesian and so learn about the asset over time. All agents are assumed to have a finite (but random) lifetime. When an agent dies, he passes his wealth (but not his knowledge) onto his heir. As a result, the agents never become sure of the dynamics of the risky asset. We derive expressions for the stock price and riskless rate. We then use numerical examples to exhibit their behaviour.

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File URL: http://arxiv.org/pdf/0907.4953
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Bibliographic Info

Paper provided by arXiv.org in its series Papers with number 0907.4953.

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Date of creation: Jul 2009
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Handle: RePEc:arx:papers:0907.4953

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Web page: http://arxiv.org/

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  1. Ehud Kalai & Ehud Lehrer, 1990. "Rational Learning Leads to Nash Equilibrium," Discussion Papers 925, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  2. Nikolaus Hautsch & Dieter Hess, 2004. "Bayesian Learning in Financial Markets: Testing for the Relevance of Information Precision in Price Discovery," Discussion Papers 04-17, University of Copenhagen. Department of Economics.
  3. Angus A Brown & L C G Rogers, 2010. "Diverse Beliefs," Papers 1001.1450, arXiv.org.
  4. Elyès Jouini & Clotilde Napp, 2003. "Consensus consumer and intertemporal asset pricing with heterogeneous beliefs," Finance 0312001, EconWPA.
  5. Ho-Mou Wu & Wen-Chung Guo, 2003. "Speculative trading with rational beliefs and endogenous uncertainty," Economic Theory, Springer, vol. 21(2), pages 263-292, 03.
  6. Min Fan, 2006. "Heterogeneous Beliefs, the Term Structure and Time-varying Risk Premia," Annals of Finance, Springer, vol. 2(3), pages 259-285, July.
  7. Morris, Stephen, 1996. "Speculative Investor Behavior and Learning," The Quarterly Journal of Economics, MIT Press, vol. 111(4), pages 1111-33, November.
  8. Li, Tao, 2007. "Heterogeneous beliefs, asset prices, and volatility in a pure exchange economy," Journal of Economic Dynamics and Control, Elsevier, vol. 31(5), pages 1697-1727, May.
  9. Basak, Suleyman, 2005. "Asset pricing with heterogeneous beliefs," Journal of Banking & Finance, Elsevier, vol. 29(11), pages 2849-2881, November.
  10. Kurz, Mordecai, 1994. "On the Structure and Diversity of Rational Beliefs," Economic Theory, Springer, vol. 4(6), pages 877-900, October.
  11. Kurz, Mordecai, 2008. "Beauty contests under private information and diverse beliefs: How different?," Journal of Mathematical Economics, Elsevier, vol. 44(7-8), pages 762-784, July.
  12. Kandel, Eugene & Pearson, Neil D, 1995. "Differential Interpretation of Public Signals and Trade in Speculative Markets," Journal of Political Economy, University of Chicago Press, vol. 103(4), pages 831-72, August.
  13. Kurz, Mordecai & Motolese, Maurizio, 2006. "Risk Premia, diverse belief and beauty contests," MPRA Paper 247, University Library of Munich, Germany.
  14. Michael Gallmeyer & Burton Hollifield, 2008. "An Examination of Heterogeneous Beliefs with a Short-Sale Constraint in a Dynamic Economy," Review of Finance, European Finance Association, vol. 12(2), pages 323-364.
  15. Ho-Mou Wu & Wen-Chung Guo, 2004. "Asset price volatility and trading volume with rational beliefs," Economic Theory, Springer, vol. 23(4), pages 795-829, May.
  16. Harrison, J Michael & Kreps, David M, 1978. "Speculative Investor Behavior in a Stock Market with Heterogeneous Expectations," The Quarterly Journal of Economics, MIT Press, vol. 92(2), pages 323-36, May.
  17. Basak, Suleyman, 2000. "A model of dynamic equilibrium asset pricing with heterogeneous beliefs and extraneous risk," Journal of Economic Dynamics and Control, Elsevier, vol. 24(1), pages 63-95, January.
  18. Andrea Buraschi & Alexei Jiltsov, 2006. "Model Uncertainty and Option Markets with Heterogeneous Beliefs," Journal of Finance, American Finance Association, vol. 61(6), pages 2841-2897, December.
  19. Hiroyuki Nakata, 2007. "A Model of Financial Markets with Endogenously Correlated Rational Beliefs," Economic Theory, Springer, vol. 30(3), pages 431-452, March.
  20. Schinkel, Maarten Pieter & Tuinstra, Jan & Vermeulen, Dries, 2002. "Convergence of Bayesian learning to general equilibrium in mis-specified models," Journal of Mathematical Economics, Elsevier, vol. 38(4), pages 483-508, December.
  21. Mordecai Kurz & Hehui Jin & Maurizio Motolese, 2005. "Determinants of stock market volatility and risk premia," Annals of Finance, Springer, vol. 1(2), pages 109-147, 07.
  22. Jouini, Elyès & Napp, Clotilde, 2007. "Consensus Consumer and Intertemporal Asset Pricing with Heterogeneous Beliefs," Economics Papers from University Paris Dauphine 123456789/78, Paris Dauphine University.
  23. Harris, Milton & Raviv, Artur, 1993. "Differences of Opinion Make a Horse Race," Review of Financial Studies, Society for Financial Studies, vol. 6(3), pages 473-506.
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Cited by:
  1. Nakov, Anton & Nuño, Galo, 2014. "Learning from Experience in the Stock Market," CEPR Discussion Papers 9845, C.E.P.R. Discussion Papers.
  2. A. A. Brown, 2009. "Heterogeneous Beliefs with Partial Observations," Papers 0907.4950, arXiv.org.
  3. Angus A Brown & L C G Rogers, 2010. "Diverse Beliefs," Papers 1001.1450, arXiv.org.

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