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Heterogeneous Beliefs and Asset Pricing in Discrete Time : an Analysis of Pessimism and Doubt

  • Jouini, Elyès
  • Napp, Clotilde
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    The aim of the paper is to analyze the impact of heterogeneous beliefs in an otherwise standard competitive complete markets discrete time economy. The construction of a consensus belief, as well as a consensus consumer are shown to be valid modulo a predictable aggregation bias, which takes the form of a discount factor. We use our construction of a consensus consumer to investigate the impact of beliefs heterogeneity on the CCAPM and on the expression of the risk free rate. We focus on the pessimism/doubt of the consensus consumer and we study their impact on the equilibrium characteristics (market price of risk, risk free rate). We finally analyze how pessimism and doubt at the aggregate level result from pessimism and doubt at the individual level.

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    Paper provided by Paris Dauphine University in its series Economics Papers from University Paris Dauphine with number 123456789/341.

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    Date of creation: Jul 2006
    Date of revision:
    Publication status: Published in Journal of Economic Dynamics and Control, 2006, Vol. 30, no. 7. pp. 1233-1260.Length: 27 pages
    Handle: RePEc:dau:papers:123456789/341
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