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Aggregation of Heterogeneous Beliefs

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  • Clotilde Napp

    ()
    (DRM - Dauphine Recherches en Management - CNRS : UMR7088 - Université Paris Dauphine - Paris IX, CREST - Centre de Recherche en Économie et Statistique - INSEE - École Nationale de la Statistique et de l'Administration Économique)

  • Elyès Jouini

    ()
    (CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - CNRS : UMR7534 - Université Paris Dauphine - Paris IX)

Abstract

This paper is a generalization of [Calvet, L., Grandmont, J.-M., Lemaire, I., 2002. Aggregation of heterogenous beliefs and asset pricing in complete financial markets. Working paper] 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, L., Grandmont, J.-M., Lemaire, I., 2002. Aggregation of heterogenous beliefs and asset pricing in complete financial markets. Working paper], 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

Paper provided by HAL in its series Post-Print with number halshs-00151562.

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Date of creation: Sep 2006
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Publication status: Published, Journal of Mathematical Economics, 2006, 42, 6, 752-770
Handle: RePEc:hal:journl:halshs-00151562

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Keywords: Heterogeneous beliefs; Consensus belief; Aggregation of belief; Representative agents;

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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. 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.
  3. Elyès Jouini & Clotilde Napp, 2003. "Consensus consumer and intertemporal asset pricing with heterogeneous beliefs," Finance 0312001, EconWPA.
  4. 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.
  5. Rubinstein, Mark, 1974. "An aggregation theorem for securities markets," Journal of Financial Economics, Elsevier, vol. 1(3), pages 225-244, September.
  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. Min Shen & Gabriel Turinici, 2012. "Liquidity generated by heterogeneous beliefs and costly estimations," Post-Print hal-00638966, HAL.
  2. He, Xue-Zhong & Treich, Nicolas, 2013. "Heterogeneous Beliefs and Prediction Market Accuracy," LERNA Working Papers 13.05.392, LERNA, University of Toulouse.
  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. Costas Xiouros, 2006. "Asset price volatilities and trading volumes in heterogeneous agent economies," Computing in Economics and Finance 2006 466, Society for Computational Economics.
  5. Amos Storkey, 2011. "Machine Learning Markets," Papers 1106.4509, arXiv.org.

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