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Unbiased Disagreement in financial markets, waves of pessimism and the risk return tradeoff

Listed author(s):
  • Elyès Jouini

    ()

    (CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - CNRS - Centre National de la Recherche Scientifique - Université Paris-Dauphine)

  • Clotilde Napp

    (DRM - Dauphine Recherches en Management - Université Paris-Dauphine - CNRS - Centre National de la Recherche Scientifique)

Can investors with irrational beliefs be neglected as long as they are rational on average ? Do their trades cancel out with no consequences on prices, as implicitly assumed by traditional models? We consider a model with irrational investors, who are rational on average. We obtain waves of pessimism and optimism that lead to countercyclical market prices of risk and procyclical risk-free rates. The variance of the state price density is greatly increased. The long run risk-return relation is mod- i ed; in particular, the long run market price of risk might be higher than both the instantaneous and the rational ones.

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Paper provided by HAL in its series Post-Print with number halshs-00488481.

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Date of creation: 2010
Publication status: Published in Review of Finance / European Finance Review, 2010, (to appear)
Handle: RePEc:hal:journl:halshs-00488481
Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-00488481
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