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Evolutionary strategic beliefs and financial markets

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  • Elyès Jouini

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

  • Clotilde Napp

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

  • Yannick Viossat

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

Abstract

We provide a discipline for belief formation through a model of subjective beliefs, in which agents hold strategic beliefs. More precisely, we consider beliefs as a strategic variable that agents can choose (consciously or not) in order to maximize their utility at the equilibrium. These strategic beliefs result from an evolutionary process. We find that evolutionary strategic behavior leads to belief subjectivity and heterogeneity. Optimism (resp. overconfidence) as well as pessimism (resp. doubt) both emerge from the evolution process. Furthermore, we obtain a positive correlation between pessimism (rep. doubt) and risk-tolerance. We analyse the equilibrium characteristics. Under reasonable assumptions, the consensus belief is pessimistic and, as a consequence, the risk premium is higher than in a standard setting.

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Bibliographic Info

Paper provided by HAL in its series Post-Print with number halshs-00556490.

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Date of creation: 01 Mar 2012
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Publication status: Published, Review of Finance, 2012, 1
Handle: RePEc:hal:journl:halshs-00556490

Note: View the original document on HAL open archive server: http://halshs.archives-ouvertes.fr/halshs-00556490
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Keywords: Beliefs formation; strategic beliefs; optimal beliefs; distorded beliefs; pessimism; risk premium;

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