IDEAS home Printed from https://ideas.repec.org/a/wly/econjl/v119y2009i536p354-376.html

Diverse Beliefs, Survival and the Market Price of Risk

Author

Listed:
  • Timothy Cogley
  • Thomas J. Sargent

Abstract

We study prices and allocations in a complete‐markets, pure‐exchange economy in which there are two types of agents with different priors over infinite sequences of the aggregate endowment. Aggregate consumption growth evolves exogenously according to a two‐state Markov process. The economy has two types of agents, one that learns about transition probabilities and another that knows them. We examine allocations, the market price of risk and the rate at which asset prices converge to values that would be computed under the assumption that all agents know the transition probabilities.

Suggested Citation

  • Timothy Cogley & Thomas J. Sargent, 2009. "Diverse Beliefs, Survival and the Market Price of Risk," Economic Journal, Royal Economic Society, vol. 119(536), pages 354-376, March.
    • Handle: RePEc:wly:econjl:v:119:y:2009:i:536:p:354-376
    DOI: 10.1111/j.1468-0297.2008.02237.x
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/j.1468-0297.2008.02237.x
    Download Restriction: no
    File URL: https://libkey.io/10.1111/j.1468-0297.2008.02237.x?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Lars Peter Hansen & Thomas J Sargent, 2014. "Beliefs, Doubts and Learning: Valuing Macroeconomic Risk," World Scientific Book Chapters, in: UNCERTAINTY WITHIN ECONOMIC MODELS, chapter 10, pages 331-377, World Scientific Publishing Co. Pte. Ltd..
    2. Hansen, Lars Peter & Sargent, Thomas J., 2007. "Recursive robust estimation and control without commitment," Journal of Economic Theory, Elsevier, vol. 136(1), pages 1-27, September.
    3. Sanford J. Grossman, 1981. "An Introduction to the Theory of Rational Expectations Under Asymmetric Information," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 48(4), pages 541-559.
    4. Pok-sang Lam & Stephen G. Cecchetti & Nelson C. Mark, 2000. "Asset Pricing with Distorted Beliefs: Are Equity Returns Too Good to Be True?," American Economic Review, American Economic Association, vol. 90(4), pages 787-805, September.
    5. Beker, Pablo F. & Espino, Emilio, 2011. "The dynamics of efficient asset trading with heterogeneous beliefs," Journal of Economic Theory, Elsevier, vol. 146(1), pages 189-229, January.
    6. Cogley, Timothy & Sargent, Thomas J., 2008. "The market price of risk and the equity premium: A legacy of the Great Depression?," Journal of Monetary Economics, Elsevier, vol. 55(3), pages 454-476, April.
    7. Lars Peter Hansen, 2007. "Beliefs, Doubts and Learning: Valuing Economic Risk," NBER Working Papers 12948, National Bureau of Economic Research, Inc.
    8. Hansen, Lars Peter & Jagannathan, Ravi, 1991. "Implications of Security Market Data for Models of Dynamic Economies," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 225-262, April.
    9. Lawrence Blume & David Easley, 2006. "If You're so Smart, why Aren't You Rich? Belief Selection in Complete and Incomplete Markets," Econometrica, Econometric Society, vol. 74(4), pages 929-966, July.
    10. Leonid Kogan & Stephen A. Ross & Jiang Wang & Mark M. Westerfield, 2006. "The Price Impact and Survival of Irrational Traders," Journal of Finance, American Finance Association, vol. 61(1), pages 195-229, February.
    11. Peter Bossaerts, 2004. "Filtering Returns for Unspecified Biases in Priors when Testing Asset Pricing Theory," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 71(1), pages 63-86.
    12. Joseph G. Pearlman & Thomas J. Sargent, 2005. "Knowing the Forecasts of Others," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(2), pages 480-497, April.
    13. Townsend, Robert M, 1983. "Forecasting the Forecasts of Others," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 546-588, August.
    14. Milton Friedman & Anna J. Schwartz, 1963. "A Monetary History of the United States, 1867–1960," NBER Books, National Bureau of Economic Research, Inc, number frie63-1, December.
    15. Milgrom, Paul & Stokey, Nancy, 1982. "Information, trade and common knowledge," Journal of Economic Theory, Elsevier, vol. 26(1), pages 17-27, February.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Roland Rathelot, 2012. "Measuring Segregation When Units are Small: A Parametric Approach," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 30(4), pages 546-553, June.
    2. Jean-Philippe Bouchaud & Roger E. A. Farmer, 2023. "Self-Fulfilling Prophecies, Quasi Nonergodicity, and Wealth Inequality," Journal of Political Economy, University of Chicago Press, vol. 131(4), pages 947-993.
    3. Hommes, Cars & in ’t Veld, Daan, 2017. "Booms, busts and behavioural heterogeneity in stock prices," Journal of Economic Dynamics and Control, Elsevier, vol. 80(C), pages 101-124.
    4. Philip Kostov & Sophia Davidova, 2023. "Smallholders Are Not the Same: Under the Hood of Kosovo Agriculture," Land, MDPI, vol. 12(1), pages 1-16, January.
    5. Pataracchia, B., 2013. "Ambiguity aversion and heterogeneity in financial markets : An empirical and theoretical perspective," Other publications TiSEM bc849a3c-87a4-4718-b049-f, Tilburg University, School of Economics and Management.
    6. Easley, David & Yang, Liyan, 2015. "Loss aversion, survival and asset prices," Journal of Economic Theory, Elsevier, vol. 160(C), pages 494-516.
    7. Dindo, Pietro, 2019. "Survival in speculative markets," Journal of Economic Theory, Elsevier, vol. 181(C), pages 1-43.
    8. Strzalecki, Tomasz & Werner, Jan, 2011. "Efficient allocations under ambiguity," Journal of Economic Theory, Elsevier, vol. 146(3), pages 1173-1194, May.
    9. Alan Guoming Huang & Eric Hughson & J. Chris Leach, 2016. "Generational Asset Pricing, Equity Puzzles, and Cyclicality," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 22, pages 52-71, October.
    10. Zhang, Renbin & Zhang, Tongbin, 2025. "The AH premium: A tale of “siamese twin” stocks," Journal of Empirical Finance, Elsevier, vol. 81(C).
    11. Vladimir Dombrovskii & Tatyana Obyedko, 2014. "Dynamic Investment Portfolio Optimization under Constraints in the Financial Market with Regime Switching using Model Predictive Control," Papers 1410.1136, arXiv.org.
    12. Mark Gertler & Nobuhiro Kiyotaki & Andrea Prestipino, 2020. "Credit Booms, Financial Crises, and Macroprudential Policy," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 37, pages 8-33, August.
    13. Beker, Pablo F. & Espino, Emilio, 2011. "The dynamics of efficient asset trading with heterogeneous beliefs," Journal of Economic Theory, Elsevier, vol. 146(1), pages 189-229, January.
    14. Roger Farmer & Jean-Philippe Bouchaud, 2020. "Self-Fulfilling Prophecies, Quasi Non-Ergodicity & Wealth Inequality," NBER Working Papers 28261, National Bureau of Economic Research, Inc.
    15. Kostov, Philip & Davidova, Sophia, "undated". "One size does not fit all: an empirical investigation of the Romanian agriculture production function," 91st Annual Conference, April 24-26, 2017, Royal Dublin Society, Dublin, Ireland 258642, Agricultural Economics Society.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Harjoat S. Bhamra & Raman Uppal, 2014. "Asset Prices with Heterogeneity in Preferences and Beliefs," The Review of Financial Studies, Society for Financial Studies, vol. 27(2), pages 519-580.
    2. Pierre Collin-Dufresne & Michael Johannes & Lars A. Lochstoer, 2016. "Parameter Learning in General Equilibrium: The Asset Pricing Implications," American Economic Review, American Economic Association, vol. 106(3), pages 664-698, March.
    3. Potì, Valerio & Levich, Richard M. & Pattitoni, Pierpaolo & Cucurachi, Paolo, 2014. "Predictability, trading rule profitability and learning in currency markets," International Review of Financial Analysis, Elsevier, vol. 33(C), pages 117-129.
    4. Cogley, Timothy & Sargent, Thomas J., 2008. "The market price of risk and the equity premium: A legacy of the Great Depression?," Journal of Monetary Economics, Elsevier, vol. 55(3), pages 454-476, April.
    5. Raghu Suryanarayanan, 2006. "Implications of Anticipated Regret and Endogenous Beliefs for Equilibrium Asset Prices: A Theoretical Framework," CSEF Working Papers 162, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    6. Chen, Ji & Yang, Xinglin & Liu, Xiliang, 2022. "Learning, disagreement and inflation forecasting," The North American Journal of Economics and Finance, Elsevier, vol. 63(C).
    7. Borovička, Jaroslav & Hansen, Lars Peter, 2014. "Examining macroeconomic models through the lens of asset pricing," Journal of Econometrics, Elsevier, vol. 183(1), pages 67-90.
    8. Thomas J. Sargent, 2012. "Nobel Lecture: United States Then, Europe Now," Journal of Political Economy, University of Chicago Press, vol. 120(1), pages 1-40.
    9. Demian Pouzo & Ignacio Presno, 2016. "Sovereign Default Risk and Uncertainty Premia," American Economic Journal: Macroeconomics, American Economic Association, vol. 8(3), pages 230-266, July.
    10. Yiqun Mou & Lars A. Lochstoer & Michael Johannes, 2011. "Learning about Consumption Dynamics," 2011 Meeting Papers 306, Society for Economic Dynamics.
    11. Tim W. Cogley & Thomas J. Sargent, 2005. "The Market Price of Risk and the Equity Premium," Working Papers 522, University of California, Davis, Department of Economics.
    12. Hansen, Lars Peter & Sargent, Thomas J., 2011. "Robustness and ambiguity in continuous time," Journal of Economic Theory, Elsevier, vol. 146(3), pages 1195-1223, May.
    13. Klaus Adam & Albert Marcet & Juan Pablo Nicolini, 2016. "Stock Market Volatility and Learning," Journal of Finance, American Finance Association, vol. 71(1), pages 33-82, February.
    14. Fabrice Collard & Sujoy Mukerji & Kevin Sheppard & Jean‐Marc Tallon, 2018. "Ambiguity and the historical equity premium," Quantitative Economics, Econometric Society, vol. 9(2), pages 945-993, July.
    15. Gurdip Bakshi, 2009. "Du subjectiv expectations explain asset pricing puzzles?," 2009 Meeting Papers 1234, Society for Economic Dynamics.
    16. 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.
    17. Wei Xiong, 2013. "Bubbles, Crises, and Heterogeneous Beliefs," NBER Working Papers 18905, National Bureau of Economic Research, Inc.
    18. Eric Aldrich, 2012. "Trading Volume in General Equilibrium with Complete Markets," 2012 Meeting Papers 36, Society for Economic Dynamics.
    19. Andreas Fuster & Benjamin Hebert & David Laibson, 2012. "Natural Expectations, Macroeconomic Dynamics, and Asset Pricing," NBER Macroeconomics Annual, University of Chicago Press, vol. 26(1), pages 1-48.
    20. Borovička, Jaroslav & Hansen, Lars Peter, 2014. "Examining macroeconomic models through the lens of asset pricing," Journal of Econometrics, Elsevier, vol. 183(1), pages 67-90.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wly:econjl:v:119:y:2009:i:536:p:354-376. See general information about how to correct material in RePEc.

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/resssea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.