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Equilibrium with divergence of opinion

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Author Info
Miller, Edward M. (University of New Orleans)
Abstract

Because the less informed incorrectly estimate asset returns, they anticipate higher returns from their risky investments. They thus over-invest in risky securities. They are rewarded by higher total portfolio returns. Too high a proportion of less informed investors lowers the return on risky assets. Equilibrium requires that the less informed’s rate of return equal the informed’s. The less informed control a stable equilibrium percentage of total wealth. Because an individual’s recent investment experience correlates with his terminal wealth, learning need not reduce the less informed’s risky asset exposure. Implications exist for the slope of the return versus systematic risk curve.

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Paper provided by University of New Orleans, Department of Economics and Finance in its series Working Papers with number 1999-17.

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Length: 29 pages
Date of creation: 1999
Date of revision:
Handle: RePEc:uno:wpaper:1999-17

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Related research
Keywords: High-risk securities; Investment strategies;

Find related papers by JEL classification:
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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  1. De Long, J Bradford, et al, 1990. " Positive Feedback Investment Strategies and Destabilizing Rational Speculation," Journal of Finance, American Finance Association, vol. 45(2), pages 379-95, June. [Downloadable!] (restricted)
    Other versions:
  2. De Long, J Bradford & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1990. "Noise Trader Risk in Financial Markets," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 703-38, August. [Downloadable!] (restricted)
    Other versions:
  3. J. Bradford De Long & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann,, . "The Survival of Noise Traders in Financial Markets," J. Bradford De Long's Working Papers _123, University of California at Berkeley, Economics Department. [Downloadable!]
    Other versions:
  4. Shefrin, Hersh & Statman, Meir, 1994. "Behavioral Capital Asset Pricing Theory," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 29(03), pages 323-349, September. [Downloadable!]
  5. Shleifer, Andrei & Summers, Lawrence H, 1990. "The Noise Trader Approach to Finance," Journal of Economic Perspectives, American Economic Association, vol. 4(2), pages 19-33, Spring. [Downloadable!] (restricted)
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  11. De Bondt, Werner F M & Thaler, Richard H, 1987. " Further Evidence on Investor Overreaction and Stock Market Seasonalit y," Journal of Finance, American Finance Association, vol. 42(3), pages 557-81, July. [Downloadable!] (restricted)
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