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Wealth Dynamics in a Bond Economy with Heterogeneous Beliefs

Author

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  • Timothy Cogley
  • Thomas J. Sargent
  • Viktor Tsyrennikov

Abstract

Two types of agents have diverse beliefs about the law of motion for an exogenous endowment. One type knows the true law of motion and the other learns about it via Bayes' theorem. Financial market structure affects the dynamics of the distribution of financial wealth. When markets are complete, the learning agent loses wealth, as in Blume and Easley (2006). The absence of markets for some Arrow securities alters the direction in which wealth is transferred relative to a complete markets economy. In an economy in which only a risk-free bond is traded, the learning agent accumulates wealth, both agents survive asymptotically, and the more knowledgeable agent is driven to his debt limit.
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Suggested Citation

  • Timothy Cogley & Thomas J. Sargent & Viktor Tsyrennikov, 2014. "Wealth Dynamics in a Bond Economy with Heterogeneous Beliefs," Economic Journal, Royal Economic Society, vol. 124(575), pages 1-30, March.
  • Handle: RePEc:wly:econjl:v:124:y:2014:i:575:p:1-30
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    File URL: http://hdl.handle.net/10.1111/ecoj.2014.124.issue-575
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    References listed on IDEAS

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    1. Duffie, Darrell, et al, 1994. "Stationary Markov Equilibria," Econometrica, Econometric Society, vol. 62(4), pages 745-781, July.
    2. Timothy Cogley & Thomas J. Sargent & Viktor Tsyrennikov, 2014. "Wealth Dynamics in a Bond Economy with Heterogeneous Beliefs," Economic Journal, Royal Economic Society, vol. 124(575), pages 1-30, March.
    3. 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.
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    12. Jaroslav Borovicka, 2011. "Survival and long-run dynamics with heterogeneous beliefs under recursive preferences," Working Paper Series WP-2011-06, Federal Reserve Bank of Chicago.
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    Cited by:

    1. Timothy Cogley & Thomas J. Sargent & Viktor Tsyrennikov, 2014. "Wealth Dynamics in a Bond Economy with Heterogeneous Beliefs," Economic Journal, Royal Economic Society, vol. 124(575), pages 1-30, March.
    2. Rarytska, Olena & Tsyrennikov, Viktor, 2016. "Capital Flows, Beliefs, and Capital Controls," Working Papers 250031, Cornell University, Department of Applied Economics and Management.
    3. repec:eee:jmacro:v:53:y:2017:i:c:p:162-175 is not listed on IDEAS
    4. Beker, Pablo F & Espino, Emilio, 2013. "Too Good to Be True: Asset Pricing Implications of Pessimism," The Warwick Economics Research Paper Series (TWERPS) 1031, University of Warwick, Department of Economics.
    5. Pietro Dindo & Filippo Massari, 2017. "The Wisdom of the Crowd in Dynamic Economies," Working Papers 2017:17, Department of Economics, University of Venice "Ca' Foscari".
    6. Viktor Tsyrennikov, 2012. "Heterogeneous Beliefs, Wealth Distribution, and Asset Markets with Risk of Default," American Economic Review, American Economic Association, vol. 102(3), pages 156-160, May.
    7. Blume, Lawrence E. & Cogley, Timothy & Easley, David A. & Sargent, Thomas J. & Tsyrennikov, Viktor, 2015. "A Case for Incomplete Markets," Economics Series 313, Institute for Advanced Studies.
    8. Viktor Tsyrennikov, 2015. "Investment, speculation, and financial regulation," 2015 Meeting Papers 627, Society for Economic Dynamics.
    9. Yili Chien & Harold Cole & Hanno Lustig, 2016. "Implications of Heterogeneity in Preferences, Beliefs and Asset Trading Technologies in an Endowment Economy," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 20, pages 215-239, April.
    10. Giulio Bottazzi & Pietro Dindo & Daniele Giachini, 2018. "Momentum and Reversal in Financial Markets with Persistent Heterogeneity," LEM Papers Series 2018/04, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.

    More about this item

    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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