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Asset Prices with Heterogenous Beliefs

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  • Basak, Suleyman

Abstract

This article studies the dynamic behaviour of security prices in the presence of investors? heterogeneous beliefs. We provide a tractable continuous-time pure-exchange model and highlight the mechanism through which investors? differences of opinion enter into security prices. In the determination of equilibrium, we employ a representative investor with stochastic weights and solve for all economic quantities in closed form, including the perceived market prices of risk and interest rate. The basic analysis is generalized to incorporate multiple sources of risk, disagreement about non-fundamentals, and multiple investors. Other applications involving multiple goods and nominal asset pricing within monetary economies are discussed.

Suggested Citation

  • Basak, Suleyman, 2004. "Asset Prices with Heterogenous Beliefs," CEPR Discussion Papers 4256, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:4256
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    More about this item

    Keywords

    C60; Heterogenous beliefs; Asset pricing; Equilibrium; Market price of risk; Survey;
    All these keywords.

    JEL classification:

    • D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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