Evolution of heterogeneous beliefs and asset overvaluation
I analyze a model in which different agents have different non-rational expectations about the future price and cash flows of a risky asset. The beliefs in the society evolve according to a very general class of evolution functions that are monotone; that is if one type has increased its share in the population then all types with higher profit should also have increased their shares. I show that the price of the risky asset converges to the risk-neutral fundamental price even though all agents in the economy are risk-averse. The risky asset thus becomes overvalued as compared to the equilibrium with rational expectations. The overvaluation is a result of the evolution of beliefs and does not rely on such asymmetric assumptions as short-sale constraints or optimistic bias.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
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.:
- Martin Lettau & Sydney Ludvigson & Jessica Wachter, 2005.
"The declining equity premium: what role does macroeconomic risk play?,"
Board of Governors of the Federal Reserve System (U.S.).
- Martin Lettau & Sydney C. Ludvigson & Jessica A. Wachter, 2008. "The Declining Equity Premium: What Role Does Macroeconomic Risk Play?," Review of Financial Studies, Society for Financial Studies, vol. 21(4), pages 1653-1687, July.
- Martin Lettau & Sydney C. Ludvigson & Jessica A. Wachter, 2004. "The Declining Equity Premium: What Role Does Macroeconomic Risk Play?," NBER Working Papers 10270, National Bureau of Economic Research, Inc.
- Lettau, Martin & Ludvigson, Sydney & Wachter, Jessica, 2006. "The Declining Equity Premium: What Role Does Macroeconomic Risk Play?," CEPR Discussion Papers 5519, C.E.P.R. Discussion Papers.
- Martin Lettau & Sydney C. Ludvigson, 2004. "The Declining Equity Premium: What Role Does Macroeconomic Risk Play?," 2004 Meeting Papers 644, Society for Economic Dynamics.
- Miller, Edward M, 1977. "Risk, Uncertainty, and Divergence of Opinion," Journal of Finance, American Finance Association, vol. 32(4), pages 1151-68, September.
- Carl Chiarella & Xue-Zhong He, 2001.
"Asset Price and Wealth Dynamics Under Heterogeneous Expectations,"
Research Paper Series
56, Quantitative Finance Research Centre, University of Technology, Sydney.
- C. Chiarella & X-Z. He, 2001. "Asset price and wealth dynamics under heterogeneous expectations," Quantitative Finance, Taylor & Francis Journals, vol. 1(5), pages 509-526.
- Xue-Zhong (Tony) He & Carl Chiarella, 2001. "Asset Price and Wealth Dynamics under Heterogeneous Expectations," CeNDEF Workshop Papers, January 2001 5A.2, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
- Volker Böhm & Carl Chiarella, 2005.
"Mean Variance Preferences, Expectations Formation, And The Dynamics Of Random Asset Prices,"
Wiley Blackwell, vol. 15(1), pages 61-97.
- Volker Bohm & Carl Chiarella, 2000. "Mean Variance Preferences, Expectations Formation, and the Dynamics of Random Asset Prices," Research Paper Series 46, Quantitative Finance Research Centre, University of Technology, Sydney.
- Chiarella, Carl & He, Xue-Zhong, 2002.
"Heterogeneous Beliefs, Risk and Learning in a Simple Asset Pricing Model,"
Society for Computational Economics, vol. 19(1), pages 95-132, February.
- Carl Chiarella & Xue-Zhong He, 1999. "Heterogeneous Beliefs, Risks and Learning in a Simple Asset Pricing Model," Research Paper Series 18, Quantitative Finance Research Centre, University of Technology, Sydney.
- Xue-Zhong He & Carl Chiarella, 1999. "Heterogeneous Beliefs, Risk and Learning in a Simple Asset-Pricing Model," Computing in Economics and Finance 1999 223, Society for Computational Economics.
- William A. Brock & Cars H. Hommes, 1997.
"A Rational Route to Randomness,"
Econometric Society, vol. 65(5), pages 1059-1096, September.
- Hommes, Cars & Huang, Hai & Wang, Duo, 2005. "A robust rational route to randomness in a simple asset pricing model," Journal of Economic Dynamics and Control, Elsevier, vol. 29(6), pages 1043-1072, June.
- Bohm, Volker & Wenzelburger, Jan, 2005.
"On the performance of efficient portfolios,"
Journal of Economic Dynamics and Control,
Elsevier, vol. 29(4), pages 721-740, April.
- De Long, J. Bradford & Shleifer, Andrei & Summers, Lawrence H. & Waldmann, Robert J., 1990.
"Noise Trader Risk in Financial Markets,"
3725552, Harvard University Department of Economics.
- Nagel, Stefan, 2005. "Short sales, institutional investors and the cross-section of stock returns," Journal of Financial Economics, Elsevier, vol. 78(2), pages 277-309, November.
- Merton, Robert C., 1987.
"A simple model of capital market equilibrium with incomplete information,"
1869-87., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Merton, Robert C, 1987. " A Simple Model of Capital Market Equilibrium with Incomplete Information," Journal of Finance, American Finance Association, vol. 42(3), pages 483-510, July.
- Blume, Lawrence & Easley, David, 1992. "Evolution and market behavior," Journal of Economic Theory, Elsevier, vol. 58(1), pages 9-40, October.
- repec:att:wimass:9621 is not listed on IDEAS
- Sethi, Rajiv & Franke, Reiner, 1995. "Behavioural Heterogeneity under Evolutionary Pressure: Macroeconomic Implications of Costly Optimisation," Economic Journal, Royal Economic Society, vol. 105(430), pages 583-600, May.
- Brock, William A. & Hommes, Cars H. & Wagener, Florian O. O., 2005.
"Evolutionary dynamics in markets with many trader types,"
Journal of Mathematical Economics,
Elsevier, vol. 41(1-2), pages 7-42, February.
- Brock, W.A. & Hommes, C.H. & Wagener, F.O.O., 2002. "Evolutionary dynamics in markets with many trader types," CeNDEF Working Papers 02-10, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
- Branch, William A. & McGough, Bruce, 2008. "Replicator dynamics in a Cobweb model with rationally heterogeneous expectations," Journal of Economic Behavior & Organization, Elsevier, vol. 65(2), pages 224-244, February.
- Brock, William A. & Hommes, Cars H., 1998.
"Heterogeneous beliefs and routes to chaos in a simple asset pricing model,"
Journal of Economic Dynamics and Control,
Elsevier, vol. 22(8-9), pages 1235-1274, August.
- Jose A. Scheinkman & Wei Xiong, 2003. "Overconfidence and Speculative Bubbles," Journal of Political Economy, University of Chicago Press, vol. 111(6), pages 1183-1219, December.
- Erik R. Sirri & Peter Tufano, 1998. "Costly Search and Mutual Fund Flows," Journal of Finance, American Finance Association, vol. 53(5), pages 1589-1622, October.
- Ippolito, Richard A, 1992. "Consumer Reaction to Measures of Poor Quality: Evidence from the Mutual Fund Industry," Journal of Law and Economics, University of Chicago Press, vol. 35(1), pages 45-70, April.
When requesting a correction, please mention this item's handle: RePEc:eee:mateco:v:45:y:2009:i:3-4:p:277-292. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.