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Bounded Rationality and Asset Pricing with Intermediate Consumption

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  • Tony Berrada

Abstract

We consider a pure exchange economy with incomplete information. Some agents display learning bias and over- or under-react to the arrival of new information. We show under which conditions biased agents survive over a finite horizon. We also study the distribution of irrational agents consumption shares. Irrational agents have a signiÞcant consumption share in the economy when (i) shocks are less persistent (ii) risk aversion is high (iii) volatility of aggregate consumption is high. We also show that agents impact on prices is increasing in their consumption share and conclude that biased agents can signiÞcantly influence equilibrium quantities. Copyright 2009, Oxford University Press.

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  • Tony Berrada, 2009. "Bounded Rationality and Asset Pricing with Intermediate Consumption," Review of Finance, European Finance Association, vol. 13(4), pages 693-725.
  • Handle: RePEc:oup:revfin:v:13:y:2009:i:4:p:693-725
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    3. Shi, Lei, 2016. "Consumption-based CAPM with belief heterogeneity," Journal of Economic Dynamics and Control, Elsevier, vol. 65(C), pages 30-46.
    4. Chabakauri, Georgy, 2010. "Asset pricing with heterogeneous investors and portfolio constraints," LSE Research Online Documents on Economics 43142, London School of Economics and Political Science, LSE Library.
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    6. Georgy Chabakauri, 2012. "Asset Pricing with Heterogeneous Investors and Portfolio Constraints," 2012 Meeting Papers 636, Society for Economic Dynamics.
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    8. Xue-Zhong He & Lei Shi, 2010. "Differences in Opinion and Risk Premium," Research Paper Series 271, Quantitative Finance Research Centre, University of Technology, Sydney.
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    10. Xue-Zhong He, 2012. "Recent Developments on Heterogeneous Beliefs and Adaptive Behaviour of Financial Markets," Research Paper Series 316, Quantitative Finance Research Centre, University of Technology, Sydney.
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    12. Gau, Yin-Feng & Hua, Mingshu & Wu, Wen-Lin, 2010. "International asset allocation for incompletely-informed investors," Journal of Financial Markets, Elsevier, vol. 13(4), pages 422-447, November.
    13. He, Xue-Zhong & Shi, Lei, 2017. "Index portfolio and welfare analysis under heterogeneous beliefs," Journal of Banking & Finance, Elsevier, vol. 75(C), pages 64-79.

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