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Disagreement, correlation and asset prices

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  • He, Xue-Zhong
  • Shi, Lei

Abstract

When people agree to disagree, how does the disagreement affect asset prices? Within an equilibrium framework with two agents, two risky assets and a riskless bond, we analyze the joint impact of disagreement about expected payoff, variance and correlation, and compare prices with benchmark prices in a market with homogeneous beliefs.

Suggested Citation

  • He, Xue-Zhong & Shi, Lei, 2012. "Disagreement, correlation and asset prices," Economics Letters, Elsevier, vol. 116(3), pages 512-515.
  • Handle: RePEc:eee:ecolet:v:116:y:2012:i:3:p:512-515
    DOI: 10.1016/j.econlet.2012.04.064
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    References listed on IDEAS

    as
    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.
    2. repec:dau:papers:123456789/4413 is not listed on IDEAS
    3. Lintner, John, 1969. "The Aggregation of Investor's Diverse Judgments and Preferences in Purely Competitive Security Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 4(04), pages 347-400, December.
    4. Jouini, Elyès & Napp, Clotilde, 2008. "Are more risk averse agents more optimistic? Insights from a rational expectations model," Economics Letters, Elsevier, vol. 101(1), pages 73-76, October.
    5. Haim Levy, 2006. "Capital Asset Prices with Heterogeneous Beliefs," The Journal of Business, University of Chicago Press, vol. 79(3), pages 1317-1354, May.
    6. repec:dau:papers:123456789/29 is not listed on IDEAS
    7. Hongjun Yan, 2010. "Is Noise Trading Cancelled Out by Aggregation?," Management Science, INFORMS, vol. 56(7), pages 1047-1059, July.
    8. Carl Chiarella & Roberto Dieci & Xue-Zhong He, 2011. "Do heterogeneous beliefs diversify market risk?," The European Journal of Finance, Taylor & Francis Journals, vol. 17(3), pages 241-258.
    9. Jouini, Elyes & Napp, Clotilde, 2006. "Heterogeneous beliefs and asset pricing in discrete time: An analysis of pessimism and doubt," Journal of Economic Dynamics and Control, Elsevier, vol. 30(7), pages 1233-1260, July.
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    11. Elyès Jouini & Clotilde Napp, 2010. "Unbiased Disagreement in Financial Markets, Waves of Pessimism and the Risk-Return Trade-off," Review of Finance, European Finance Association, vol. 15(3), pages 575-601.
    12. Elyès Jouini & Clotilde Napp, 2008. "Are More Risk-Averse Agents More Optimistic? Insights from a Simple Rational Expectations Equilibrium Model," Post-Print halshs-00176630, HAL.
    13. Duchin, Ran & Levy, Moshe, 2010. "Disagreement, Portfolio Optimization, and Excess Volatility," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 45(03), pages 623-640, June.
    14. Elyès Jouini & Clotilde Napp, 2007. "Strategic Beliefs," Working Papers halshs-00176622, HAL.
    15. Rubinstein, Mark, 1974. "An aggregation theorem for securities markets," Journal of Financial Economics, Elsevier, vol. 1(3), pages 225-244, September.
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    Citations

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    Cited by:

    1. Henry L. Friedman & Mirko S. Heinle, 2016. "Taste, information, and asset prices: implications for the valuation of CSR," Review of Accounting Studies, Springer, vol. 21(3), pages 740-767, September.
    2. Jasper de Winter & Siem Jan Koopman & Irma Hindrayanto & Anjali Chouhan, 2017. "Modeling the business and financial cycle in a multivariate structural time series model," DNB Working Papers 573, Netherlands Central Bank, Research Department.

    More about this item

    Keywords

    Equilibrium asset prices; Disagreement; Consensus belief; Mispricing; Spillover effect;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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