Heterogeneous Beliefs and the Cross-Section of Asset Returns
When agents have irrational beliefs which are rational on average, it has been shown that the effect of their trades does not cancel out in general and can lead to time variations in market price of risk and volatility. In this paper, we follow the differences-in-opinion approach and show that the impact of unbiased disagreement on market equilibrium is much stronger in a multi-asset market than in a single-asset market, in which the impact of small disagreement may be negligible. More importantly, we show that different type of disagreement contribute significantly to explain the cross-section of expected returns, volatility and covariance between asset returns. In particular, disagreement can lead to excess volatility, a positive (negative) excess covariance when optimism/pessimism are positively (negatively) correlated between assets and the level of disagreement is negatively (positively) related to expected future returns when the relatively optimistic agent has a larger (smaller) wealth share than the pessimistic agent.
|Date of creation:||01 Mar 2012|
|Date of revision:|
|Contact details of provider:|| Postal: PO Box 123, Broadway, NSW 2007, Australia|
Phone: +61 2 9514 7777
Fax: +61 2 9514 7711
Web page: http://www.qfrc.uts.edu.au/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Andrea Buraschi & Alexei Jiltsov, 2006. "Model Uncertainty and Option Markets with Heterogeneous Beliefs," Journal of Finance, American Finance Association, vol. 61(6), pages 2841-2897, December.
- Xue-Zhong He & Lei Shi, 2012. "Disagreement in a Multi-Asset Market," International Review of Finance, International Review of Finance Ltd., vol. 12(3), pages 357-373, 09.
- Clotilde Napp & Elyès Jouini, 2007.
"Consensus consumer and intertemporal asset pricing with heterogeneous beliefs,"
- Elyès Jouini & Clotilde Napp, 2003. "Consensus consumer and intertemporal asset pricing with heterogeneous beliefs," Finance 0312001, EconWPA.
- Elyès Jouini & Clotilde Napp, 2010.
"Unbiased Disagreement in financial markets, waves of pessimism and the risk return tradeoff,"
- Elyès Jouini & Clotilde Napp, 2010. "Unbiased Disagreement in Financial Markets, Waves of Pessimism and the Risk-Return Trade-off," Review of Finance, European Finance Association, vol. 15(3), pages 575-601.
- Harjoat S. Bhamra & Raman Uppal, 2014.
"Asset Prices with Heterogeneity in Preferences and Beliefs,"
Review of Financial Studies,
Society for Financial Studies, vol. 27(2), pages 519-580.
- Bhamra, Harjoat Singh & Uppal, Raman, 2013. "Asset Prices with Heterogeneity in Preferences and Beliefs," CEPR Discussion Papers 9459, C.E.P.R. Discussion Papers.
- Raman Uppal & Harjoat Bhamra, 2013. "Asset Prices with Heterogeneity in Preferences and Beliefs," 2013 Meeting Papers 1344, Society for Economic Dynamics.
- Jouini, Elyès & Napp, Clotilde, 2007. "Consensus Consumer and Intertemporal Asset Pricing with Heterogeneous Beliefs," Economics Papers from University Paris Dauphine 123456789/78, Paris Dauphine University.
- Masahiro Watanabe, 2008. "Price Volatility and Investor Behavior in an Overlapping Generations Model with Information Asymmetry," Journal of Finance, American Finance Association, vol. 63(1), pages 229-272, 02.
- Jaksa Cvitanic & Fernando Zapatero, 2004. "Introduction to the Economics and Mathematics of Financial Markets," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262532654, June.
When requesting a correction, please mention this item's handle: RePEc:uts:rpaper:303. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Duncan Ford)
If references are entirely missing, you can add them using this form.