Asset Prices in a Time Series Model with Perpetually Disparately Informed, Competitive Traders
AbstractThis paper develops a dynamic asset pricing model with persistent heterogeneous beliefs. The model features competitive traders who receive idiosyncratic signals about an underlying fundamentals process. We adapt Futia’s (1981) frequency domain methods to derive conditions on the fundamentals that guarantee noninvertibility of the mapping between observed market data and the underlying shocks to agents’ information sets. When these conditions are satisfied, agents must ‘forecast the forecasts of others’. The paper provides an explicit analytical characterization of the resulting higher-order belief dynamics. These additional dynamics can explain apparent violations of variance bounds and rejections of cross-equation restrictions.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington in its series Caepr Working Papers with number 2006-010.
Length: 34 pages
Date of creation: Sep 2006
Date of revision:
Asymmetric Information; Blaschke Factors;
Find related papers by JEL classification:
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-09-30 (All new papers)
- NEP-FIN-2006-09-30 (Finance)
- NEP-FMK-2006-09-30 (Financial Markets)
- NEP-FOR-2006-09-30 (Forecasting)
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Lucia Alessi & Matteo Barigozzi & Marco Capasso, 2007.
"A Review of Nonfundamentalness and Identification in Structural VAR Models,"
LEM Papers Series
2007/22, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
- Alessi, Lucia & Barigozzi, Matteo & Capasso, Marco, 2008. "A review of nonfundamentalness and identification in structural VAR models," Working Paper Series 0922, European Central Bank.
- Lanne, Markku & Saikkonen, Pentti, 2010.
"Noncausal autoregressions for economic time series,"
32943, University Library of Munich, Germany.
- Lanne Markku & Saikkonen Pentti, 2011. "Noncausal Autoregressions for Economic Time Series," Journal of Time Series Econometrics, De Gruyter, vol. 3(3), pages 1-32, October.
- Bacchetta, Philippe & van Wincoop, Eric, 2008.
"Higher Order Expectations in Asset Pricing,"
CEPR Discussion Papers
6648, C.E.P.R. Discussion Papers.
- Philippe BACCHETTA & Eric VAN WINCOOP, 2004. "Higher Order Expectations in Asset Pricing," FAME Research Paper Series rp110, International Center for Financial Asset Management and Engineering.
- Philippe Bacchetta & Eric van Wincoop, 2004. "Higher Order Expectations in Asset Pricing," Working Papers 04.03, Swiss National Bank, Study Center Gerzensee.
- Lanne, Markku & Saikkonen, Pentti, 2013.
"Noncausal Vector Autoregression,"
Cambridge University Press, vol. 29(03), pages 447-481, June.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Heather Steele).
If references are entirely missing, you can add them using this form.