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Heterogenous Beliefs and Tests of Present Value Models

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  • Ken Kasa

    ()
    (Simon Fraser University)

  • Todd Walker

    ()
    (Indiana University)

  • Charles Whiteman

    ()
    (University of Iowa)

Abstract

This 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 additional dynamics of the heterogeneous beliefs equilibrium can account for observed violations of variance bounds, predictability of excess returns, and rejections of cross-equation restrictions.

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File URL: http://www.sfu.ca/econ-research/RePEc/sfu/sfudps/dp12-06.pdf
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Bibliographic Info

Paper provided by Department of Economics, Simon Fraser University in its series Discussion Papers with number dp12-06.

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Length: 34
Date of creation: Apr 2012
Date of revision:
Handle: RePEc:sfu:sfudps:dp12-06

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Postal: Department of Economics, Simon Fraser University, 8888 University Drive, Burnaby, BC, V5A 1S6, Canada
Phone: (778)782-3508
Fax: (778)782-5944
Web page: http://www.sfu.ca/economics.html
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Postal: Working Paper Coordinator, Department of Economics, Simon Fraser University, 8888 University Drive, Burnaby, BC, V5A 1S6, Canada
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Web: http://www.sfu.ca/economics/research/publications.html

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Keywords: Heterogenous beliefs; Volatility;

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References

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  1. Aleh Tsyvinski & Arijit Mukherji & Christian Hellwig, 2006. "Self-Fulfilling Currency Crises: The Role of Interest Rates," American Economic Review, American Economic Association, vol. 96(5), pages 1769-1787, December.
  2. Campbell, John & Shiller, Robert, 1987. "Cointegration and Tests of Present Value Models," Scholarly Articles 3122490, Harvard University Department of Economics.
  3. Kristoffer Nimark, 2007. "Dynamic Higher Order Expectations," 2007 Meeting Papers 542, Society for Economic Dynamics.
  4. Elias Albagli & Christian Hellwig & Aleh Tsyvinski, 2012. "A Theory of Asset Prices Based on Heterogeneous Information," Levine's Working Paper Archive 786969000000000347, David K. Levine.
  5. Foster, F Douglas & Viswanathan, S, 1996. " Strategic Trading When Agents Forecast the Forecasts of Others," Journal of Finance, American Finance Association, vol. 51(4), pages 1437-78, September.
  6. Brunnermeier, Markus K., 2001. "Asset Pricing under Asymmetric Information: Bubbles, Crashes, Technical Analysis, and Herding," OUP Catalogue, Oxford University Press, number 9780198296980, September.
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Cited by:
  1. Lof Matthijs, 2013. "Noncausality and asset pricing," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 17(2), pages 211-220, April.
  2. Edouard Djeutem & Ken Kasa, 2012. "Robustness and Exchange Rate Volatility," Discussion Papers dp12-01, Department of Economics, Simon Fraser University.

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