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Why Disagreement May Not Matter (much) for Asset Prices

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Author Info
Paul Söderlind ()

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Abstract

A simple consumption-based two-period model is used to study the (theoretical) effects of disagreement on asset prices. Analytical and numerical results show that individual uncertainty has a much larger effect on risk premia than disagreement if (i) the risk aversion is reasonably high and (ii) individual uncertainty is not much smaller than disagreement. Evidence from survey data on beliefs about output growth suggests that the latter is more than satisfied.

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File URL: http://www.vwa.unisg.ch/RePEc/usg/dp2008/DP-11-So.pdf
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Publisher Info
Paper provided by Department of Economics, University of St. Gallen in its series University of St. Gallen Department of Economics working paper series 2008 with number 2008-11.

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Length: 19 pages
Date of creation: May 2008
Date of revision:
Handle: RePEc:usg:dp2008:2008-11

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Related research
Keywords: riskfree rate; implied volatility; Survey of Professional Forecasters;

Find related papers by JEL classification:
C42 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Survey Methods
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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  1. Fama, Eugene F. & French, Kenneth R., 2007. "Disagreement, tastes, and asset prices," Journal of Financial Economics, Elsevier, vol. 83(3), pages 667-689, March. [Downloadable!] (restricted)
  2. Detemple Jerome & Murthy Shashidhar, 1994. "Intertemporal Asset Pricing with Heterogeneous Beliefs," Journal of Economic Theory, Elsevier, vol. 62(2), pages 294-320, April. [Downloadable!] (restricted)
  3. Giordani, Paolo & Soderlind, Paul, 2006. "Is there evidence of pessimism and doubt in subjective distributions? Implications for the equity premium puzzle," Journal of Economic Dynamics and Control, Elsevier, vol. 30(6), pages 1027-1043, June. [Downloadable!] (restricted)
  4. Dean Croushore, 1993. "Introducing: the survey of professional forecasters," Business Review, Federal Reserve Bank of Philadelphia, issue Nov, pages 3-15. [Downloadable!]
  5. Alexander David, 2008. "Heterogeneous Beliefs, Speculation, and the Equity Premium," Journal of Finance, American Finance Association, vol. 63(1), pages 41-83, 02. [Downloadable!] (restricted)
  6. Giordani, Paolo & Soderlind, Paul, 2003. "Inflation forecast uncertainty," European Economic Review, Elsevier, vol. 47(6), pages 1037-1059, December. [Downloadable!] (restricted)
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  7. Varian, Hal R, 1985. " Divergence of Opinion in Complete Markets: A Note," Journal of Finance, American Finance Association, vol. 40(1), pages 309-17, March. [Downloadable!] (restricted)
  8. Harrison Hong & Jeremy C. Stein, 2007. "Disagreement and the Stock Market," Journal of Economic Perspectives, American Economic Association, vol. 21(2), pages 109-128, Spring.
  9. Rubinstein, Mark, 1974. "An aggregation theorem for securities markets," Journal of Financial Economics, Elsevier, vol. 1(3), pages 225-244, September. [Downloadable!] (restricted)
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