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Consensus consumer and intertemporal asset pricing with heterogeneous beliefs

  • Clotilde Napp

    ()

    (DRM - Dauphine Recherches en Management - CNRS : UMR7088 - Université Paris Dauphine - Paris IX, CREST - Centre de Recherche en Économie et Statistique - INSEE - École Nationale de la Statistique et de l'Administration Économique)

  • Elyès Jouini

    ()

    (CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - CNRS : UMR7534 - Université Paris Dauphine - Paris IX)

The aim of the paper is to analyze the impact of heterogeneous beliefs in an otherwise standard competitive complete market economy. The construction of a consensus probability belief, as well as a consensus consumer, are shown to be valid modulo an aggregation bias, which takes the form of a discount factor. In classical cases, the consensus probability belief is a risktolerance weighted average of the individual beliefs, and the discount factor is proportional to beliefs dispersion. This discount factor makes the heterogeneous beliefs setting fundamentally different from the homogeneous beliefs setting, and it is consistent with the interpretation ofbeliefs heterogeneity as a source of risk.We then use our construction to rewrite in a simple way the equilibrium characteristics (market price of risk, risk premium, risk-free rate) in a heterogeneous beliefs framework and to analyze the impact of beliefs heterogeneity. Finally, we show that it is possible to construct specific parametrizations of the heterogeneous beliefs model that lead to globally higher risk premia and lower risk-free rates.

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Paper provided by HAL in its series Post-Print with number halshs-00152348.

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Date of creation: 01 Oct 2007
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Publication status: Published, Review of Economic Studies, 2007, 74, 1149-1174
Handle: RePEc:hal:journl:halshs-00152348
Note: View the original document on HAL open archive server: http://halshs.archives-ouvertes.fr/halshs-00152348/en/
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