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Asset Prices with Heterogenous Beliefs

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Author Info
Basak, Suleyman
Abstract

This article studies the dynamic behaviour of security prices in the presence of investors’ heterogeneous beliefs. We provide a tractable continuous-time pure-exchange model and highlight the mechanism through which investors’ differences of opinion enter into security prices. In the determination of equilibrium, we employ a representative investor with stochastic weights and solve for all economic quantities in closed form, including the perceived market prices of risk and interest rate. The basic analysis is generalized to incorporate multiple sources of risk, disagreement about non-fundamentals, and multiple investors. Other applications involving multiple goods and nominal asset pricing within monetary economies are discussed.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4256.

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Date of creation: Feb 2004
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Handle: RePEc:cpr:ceprdp:4256

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Related research
Keywords: asset pricing; C60; equilibrium; heterogenous beliefs; market price of risk; survey;

Find related papers by JEL classification:
D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
D90 - Microeconomics - - Intertemporal Choice and Growth - - - General
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing

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  23. Andrew B. Abel, . "Asset Prices Under Heterogenous Beliefs: Implications for the Equity Premium," Rodney L. White Center for Financial Research Working Papers 09-89, Wharton School Rodney L. White Center for Financial Research.
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  24. Veronesi, Pietro, 1999. "Stock Market Overreaction to Bad News in Good Times: A Rational Expectations Equilibrium Model," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 12(5), pages 975-1007.
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