Heterogeneous Beliefs and the Cross-Section of Asset Returns
AbstractWhen agents have irrational beliefs which are rational on average, it has been shown that the effect of their trades does not cancel out in general and can lead to time variations in market price of risk and volatility. In this paper, we follow the differences-in-opinion approach and show that the impact of unbiased disagreement on market equilibrium is much stronger in a multi-asset market than in a single-asset market, in which the impact of small disagreement may be negligible. More importantly, we show that different type of disagreement contribute significantly to explain the cross-section of expected returns, volatility and covariance between asset returns. In particular, disagreement can lead to excess volatility, a positive (negative) excess covariance when optimism/pessimism are positively (negatively) correlated between assets and the level of disagreement is negatively (positively) related to expected future returns when the relatively optimistic agent has a larger (smaller) wealth share than the pessimistic agent.
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Bibliographic InfoPaper provided by Quantitative Finance Research Centre, University of Technology, Sydney in its series Research Paper Series with number 303.
Date of creation: 01 Mar 2012
Date of revision:
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More information through EDIRC
disagreement; multi-asset market; expected excess returns; excess volatility; excess covariance;
Find related papers by JEL classification:
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-04-17 (All new papers)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Elyès Jouini & Clotilde Napp, 2003.
"Consensus consumer and intertemporal asset pricing with heterogeneous beliefs,"
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- Elyès Jouini & Clotilde Napp, 2010.
"Unbiased Disagreement in Financial Markets, Waves of Pessimism and the Risk-Return Trade-off,"
Review of Finance,
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- Elyès Jouini & Clotilde Napp, 2010. "Unbiased Disagreement in financial markets, waves of pessimism and the risk return tradeoff," Post-Print halshs-00488481, HAL.
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- Jouini, Elyès & Napp, Clotilde, 2007. "Consensus Consumer and Intertemporal Asset Pricing with Heterogeneous Beliefs," Economics Papers from University Paris Dauphine 123456789/78, Paris Dauphine University.
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