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Aggregation of Heterogeneous Beliefs and Asset Pricing: A Mean-Variance Analysis


  • Carl Chiarella

    (University of Technology, Sydney)

  • Roberto Dieci

    (Universita' degli Studi di Bologna)

  • Tony He

    () (University of Technology, Sydney)


The aim of this paper is to show, within the mean-variance framework, how the market belief can be constructed as the result of the aggregation of heterogeneous beliefs and how the market equilibrium prices of risky assets can thus be determined. The heterogeneous beliefs are defined in terms of not only the means but also variances and covariances. By constructing the mean and variance of the market belief, we analyze the impact of the heterogeneous beliefs on the market equilibrium asset pricing relation. In particular, we extend the standard CAPM under homogenous beliefs to the one under the heterogeneous beliefs.

Suggested Citation

  • Carl Chiarella & Roberto Dieci & Tony He, 2006. "Aggregation of Heterogeneous Beliefs and Asset Pricing: A Mean-Variance Analysis," Computing in Economics and Finance 2006 108, Society for Computational Economics.
  • Handle: RePEc:sce:scecfa:108

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    References listed on IDEAS

    1. C. Chiarella & X-Z. He, 2001. "Asset price and wealth dynamics under heterogeneous expectations," Quantitative Finance, Taylor & Francis Journals, vol. 1(5), pages 509-526.
    2. Detemple Jerome & Murthy Shashidhar, 1994. "Intertemporal Asset Pricing with Heterogeneous Beliefs," Journal of Economic Theory, Elsevier, vol. 62(2), pages 294-320, April.
    3. Chiarella, Carl & He, Xue-Zhong, 2002. "Heterogeneous Beliefs, Risk and Learning in a Simple Asset Pricing Model," Computational Economics, Springer;Society for Computational Economics, vol. 19(1), pages 95-132, February.
    4. repec:dau:papers:123456789/341 is not listed on IDEAS
    5. Chiarella, Carl & Dieci, Roberto & Gardini, Laura, 2002. "Speculative behaviour and complex asset price dynamics: a global analysis," Journal of Economic Behavior & Organization, Elsevier, vol. 49(2), pages 173-197, October.
    6. Abel, Andrew B., 2002. "An exploration of the effects of pessimism and doubt on asset returns," Journal of Economic Dynamics and Control, Elsevier, vol. 26(7-8), pages 1075-1092, July.
    7. Alan Kirman, 1993. "Ants, Rationality, and Recruitment," The Quarterly Journal of Economics, Oxford University Press, vol. 108(1), pages 137-156.
    8. Pok-sang Lam & Stephen G. Cecchetti & Nelson C. Mark, 2000. "Asset Pricing with Distorted Beliefs: Are Equity Returns Too Good to Be True?," American Economic Review, American Economic Association, vol. 90(4), pages 787-805, September.
    9. Andrew B. Abel, "undated". "Asset Prices Under Heterogenous Beliefs: Implications for the Equity Premium," Rodney L. White Center for Financial Research Working Papers 09-89, Wharton School Rodney L. White Center for Financial Research.
    10. Harvey, Campbell R., 1989. "Time-varying conditional covariances in tests of asset pricing models," Journal of Financial Economics, Elsevier, vol. 24(2), pages 289-317.
    11. Brock, William A. & Hommes, Cars H., 1998. "Heterogeneous beliefs and routes to chaos in a simple asset pricing model," Journal of Economic Dynamics and Control, Elsevier, vol. 22(8-9), pages 1235-1274, August.
    12. Chiarella, Carl & Dieci, Roberto & He, Xue-Zhong, 2007. "Heterogeneous expectations and speculative behavior in a dynamic multi-asset framework," Journal of Economic Behavior & Organization, Elsevier, vol. 62(3), pages 408-427, March.
    13. Hommes, Cars H., 2006. "Heterogeneous Agent Models in Economics and Finance," Handbook of Computational Economics,in: Leigh Tesfatsion & Kenneth L. Judd (ed.), Handbook of Computational Economics, edition 1, volume 2, chapter 23, pages 1109-1186 Elsevier.
    14. Day, Richard H. & Huang, Weihong, 1990. "Bulls, bears and market sheep," Journal of Economic Behavior & Organization, Elsevier, vol. 14(3), pages 299-329, December.
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    16. Laurent Calvet & Jean-Michel Grandmont & Isabelle Lemaire, 2001. "Aggregation of Heterogenous Beliefs and Asset Pricing in Complete Financial Markets," Working Papers 2001-01, Center for Research in Economics and Statistics.
    17. Chiarella, Carl & He, Xue-Zhong, 2003. "Heterogeneous Beliefs, Risk, And Learning In A Simple Asset-Pricing Model With A Market Maker," Macroeconomic Dynamics, Cambridge University Press, vol. 7(04), pages 503-536, September.
    18. Volker Böhm & Carl Chiarella, 2005. "Mean Variance Preferences, Expectations Formation, And The Dynamics Of Random Asset Prices," Mathematical Finance, Wiley Blackwell, vol. 15(1), pages 61-97.
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    20. Carl Chiarella, 1992. "The Dynamics of Speculative Behaviour," Working Paper Series 13, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
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    Cited by:

    1. Xue-Zhong He & Lei Shi, 2009. "Portfolio Analysis and Zero-Beta CAPM with Heterogeneous Beliefs," Research Paper Series 244, Quantitative Finance Research Centre, University of Technology, Sydney.

    More about this item


    Mean variance analysis; heterogeneous beliefs; aggregation; asset pricing;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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