Consensus consumer and intertemporal asset pricing with heterogeneous beliefs
AbstractThe aim of the paper is to analyze the impact of heterogeneous beliefs in an otherwise standard competitive complete market economy. The construction of a consensus probability belief, as well as a consensus consumer, are shown to be valid modulo an aggregation bias, which takes the form of a discount factor. In classical cases, the consensus probability belief is a risktolerance weighted average of the individual beliefs, and the discount factor is proportional to beliefs dispersion. This discount factor makes the heterogeneous beliefs setting fundamentally different from the homogeneous beliefs setting, and it is consistent with the interpretation ofbeliefs heterogeneity as a source of risk.We then use our construction to rewrite in a simple way the equilibrium characteristics (market price of risk, risk premium, risk-free rate) in a heterogeneous beliefs framework and to analyze the impact of beliefs heterogeneity. Finally, we show that it is possible to construct specific parametrizations of the heterogeneous beliefs model that lead to globally higher risk premia and lower risk-free rates.
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Bibliographic InfoPaper provided by HAL in its series Post-Print with number halshs-00152348.
Date of creation: 01 Oct 2007
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Publication status: Published, Review of Economic Studies, 2007, 74, 1149-1174
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risk premium; beliefs heterogeneity; optimism; pessimism; consensus consumer;
Other versions of this item:
- Ely�s Jouini & Clotilde Napp, 2007. "Consensus Consumer and Intertemporal Asset Pricing with Heterogeneous Beliefs," Review of Economic Studies, Oxford University Press, vol. 74(4), pages 1149-1174.
- Elyès Jouini & Clotilde Napp, 2003. "Consensus consumer and intertemporal asset pricing with heterogeneous beliefs," Finance 0312001, EconWPA.
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
- D41 - Microeconomics - - Market Structure and Pricing - - - Perfect Competition
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
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