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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. Elias Albagli & Christian Hellwig & Aleh Tsyvinski, 2011. "A Theory of Asset Prices Based on Heterogeneous Information," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 1827, Cowles Foundation for Research in Economics, Yale University.
  2. Brunnermeier, Markus K., 2001. "Asset Pricing under Asymmetric Information: Bubbles, Crashes, Technical Analysis, and Herding," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780198296980, October.
  3. Kristoffer Nimark, 2007. "Dynamic higher order expectations," Economics Working Papers, Department of Economics and Business, Universitat Pompeu Fabra 1118, Department of Economics and Business, Universitat Pompeu Fabra, revised Mar 2011.
  4. John Y. Campbell & Robert J. Shiller, 1986. "Cointegration and Tests of Present Value Models," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 785, Cowles Foundation for Research in Economics, Yale University.
  5. Christian Hellwig & Arijit Mukherji & Aleh Tsyvinski, 2005. "Self-Fulfilling Currency Crises: The Role of Interest Rates," NBER Working Papers 11191, National Bureau of Economic Research, Inc.
  6. Foster, F Douglas & Viswanathan, S, 1996. " Strategic Trading When Agents Forecast the Forecasts of Others," Journal of Finance, American Finance Association, American Finance Association, vol. 51(4), pages 1437-78, September.
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Cited by:
  1. Lof, Matthijs, 2011. "Noncausality and Asset Pricing," MPRA Paper 30519, University Library of Munich, Germany.
  2. Djeutem, Edouard & Kasa, Kenneth, 2013. "Robustness and exchange rate volatility," Journal of International Economics, Elsevier, Elsevier, vol. 91(1), pages 27-39.

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