Heterogenous Beliefs and Tests of Present Value Models
This paper develops a dynamic asset pricing model with persistent heterogeneous beliefs. The model features competitive traders who receive idiosyncratic signals about an underlying fundamentals process. We adapt Futia’s (1981) frequency domain methods to derive conditions on the fundamentals that guarantee noninvertibility of the mapping between observed market data and the underlying shocks to agents’ information sets. When these conditions are satisfied, agents must ‘forecast the forecasts of others’. The additional dynamics of the heterogeneous beliefs equilibrium can account for observed violations of variance bounds, predictability of excess returns, and rejections of cross-equation restrictions.
|Date of creation:||Apr 2012|
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|Contact details of provider:|| Postal: Department of Economics, Simon Fraser University, 8888 University Drive, Burnaby, BC, V5A 1S6, Canada|
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- Elias Albagli & Christian Hellwig & Aleh Tsyvinski, 2012.
"A Theory of Asset Prices Based on Heterogeneous Information,"
Levine's Working Paper Archive
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- Aleh Tsyvinski & Arijit Mukherji & Christian Hellwig, 2006.
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- Christian Hellwig & Arijit Mukherji & Aleh Tsyvinski, 2005. "Self-Fulfilling Currency Crises: The Role of Interest Rates," NBER Working Papers 11191, National Bureau of Economic Research, Inc.
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