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Capital Asset Prices with Heterogeneous Beliefs

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  • Haim Levy

    (Hebrew University of Jerusalem)

Abstract

We show that in a market with an infinite number of assets and investors with unbiased heterogeneous beliefs, asset prices are identical to pricing in the capital asset pricing model, even if prices reveal no information. This result holds despite the fact that in the heterogeneous market the separation theorem does not hold, and investors hold different portfolios, which are generally located below the capital market line. When the number of assets is finite, prices deviate systematically from the CAPM prices. However, we show via simulations that in a finite but reasonably large market the CAPM pricing and risk-return relationship holds almost perfectly.

Suggested Citation

  • Haim Levy, 2006. "Capital Asset Prices with Heterogeneous Beliefs," The Journal of Business, University of Chicago Press, vol. 79(3), pages 1317-1354, May.
  • Handle: RePEc:ucp:jnlbus:v:79:y:2006:i:3:p:1317-1354
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    File URL: http://dx.doi.org/10.1086/500678
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    1. repec:dau:papers:123456789/3495 is not listed on IDEAS
    2. Tong, Jun & Hu, Jiaqiao & Hu, Jianqiang, 2017. "Computing equilibrium prices for a capital asset pricing model with heterogeneous beliefs and margin-requirement constraints," European Journal of Operational Research, Elsevier, vol. 256(1), pages 24-34.
    3. 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.
    4. Lei Shi, 2010. "Portfolio Analysis and Equilibrium Asset Pricing with Heterogeneous Beliefs," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 9, November.
    5. Shi, Lei, 2016. "Consumption-based CAPM with belief heterogeneity," Journal of Economic Dynamics and Control, Elsevier, vol. 65(C), pages 30-46.
    6. He, Xue-Zhong & Shi, Lei, 2012. "Disagreement, correlation and asset prices," Economics Letters, Elsevier, vol. 116(3), pages 512-515.
    7. Yi-Cheng Shih & Sheng-Syan Chen & Cheng-Few Lee & Po-Jung Chen, 2014. "The evolution of capital asset pricing models," Review of Quantitative Finance and Accounting, Springer, vol. 42(3), pages 415-448, April.

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