Non-Equivalent Beliefs and Subjective Equilibrium Bubbles
This paper develops a dynamic equilibrium model where agents exhibit a strong form of belief heterogeneity: they disagree about zero probability events. It is shown that, somewhat surprisingly, equilibrium exists in this setting, and that the disagreement about nullsets naturally leads to equilibrium asset pricing bubbles. The bubbles are subjective in the sense that they are perceived by some but not necessarily all agents. In contrast to existing models, bubbles arise with no restrictions on trade beyond a standard solvency constraint.
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.:
- Mark Loewenstein & Gregory A. Willard, 2006. "The Limits of Investor Behavior," Journal of Finance, American Finance Association, vol. 61(1), pages 231-258, 02.
- Lior Menzly & Tano Santos & Pietro Veronesi, 2004. "Understanding Predictability," Journal of Political Economy, University of Chicago Press, vol. 112(1), pages 1-47, February.
- Elyès Jouini & Clotilde Napp, 2003.
"Consensus consumer and intertemporal asset pricing with heterogeneous beliefs,"
- Elyès Jouini & Clotilde Napp, 2007. "Consensus Consumer and Intertemporal Asset Pricing with Heterogeneous Beliefs," Review of Economic Studies, Oxford University Press, vol. 74(4), pages 1149-1174.
- Clotilde Napp & Elyès Jouini, 2007. "Consensus consumer and intertemporal asset pricing with heterogeneous beliefs," Post-Print halshs-00152348, HAL.
- Jaksa Cvitanic & Elyès Jouini & Semyon Malamud & Clotilde Napp, 2011.
"Financial Markets Equilibrium with Heterogeneous Agents,"
Review of Finance,
European Finance Association, vol. 16(1), pages 285-321.
- Jaksa Cvitanic & Elyès Jouini & Semyon Malamud & Clotilde Napp, 2012. "Financial Markets Equilibrium with Heterogeneous Agents," Post-Print halshs-00488537, HAL.
- Berrada, Tony & Hugonnier, Julien & Rindisbacher, Marcel, 2007. "Heterogeneous preferences and equilibrium trading volume," Journal of Financial Economics, Elsevier, vol. 83(3), pages 719-750, March.
- Manuel S. Santos & Michael Woodford, 1993.
"Rational Asset Pricing Bubbles,"
9304, Centro de Investigacion Economica, ITAM.
- Basak, Suleyman, 2005. "Asset pricing with heterogeneous beliefs," Journal of Banking & Finance, Elsevier, vol. 29(11), pages 2849-2881, November.
- J. Hugonnier & S. Malamud & E. Trubowitz, 2012.
"Endogenous Completeness of Diffusion Driven Equilibrium Markets,"
Econometric Society, vol. 80(3), pages 1249-1270, 05.
- Julien HUGONNIER & Semyon MALAMUD & Eugene TRUBOWITZ, "undated". "Endogenous completeness of diffusion driven equilibrium markets," Swiss Finance Institute Research Paper Series 09-41, Swiss Finance Institute.
- repec:dau:papers:123456789/78 is not listed on IDEAS
- Hugonnier, Julien, 2012. "Rational asset pricing bubbles and portfolio constraints," Journal of Economic Theory, Elsevier, vol. 147(6), pages 2260-2302.
- Basak, Suleyman, 2000. "A model of dynamic equilibrium asset pricing with heterogeneous beliefs and extraneous risk," Journal of Economic Dynamics and Control, Elsevier, vol. 24(1), pages 63-95, January.
- Daniel Fernholz & Ioannis Karatzas, 2010. "On optimal arbitrage," Papers 1010.4987, arXiv.org.
- repec:dau:papers:123456789/4724 is not listed on IDEAS
When requesting a correction, please mention this item's handle: RePEc:arx:papers:1306.5082. 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: (arXiv administrators)
If references are entirely missing, you can add them using this form.