IDEAS home Printed from https://ideas.repec.org/p/wpa/wuwpfi/0312001.html
   My bibliography  Save this paper

Consensus consumer and intertemporal asset pricing with heterogeneous beliefs

Author

Listed:
  • Elyès Jouini

    (Dauphine)

  • Clotilde Napp

    (Dauphine & CREST)

Abstract

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 belief, as well as a consensus consumer, are shown to be valid modulo a finite variation aggregation bias, which takes the form of a discount factor. We then use our construction to rewrite in a simple way the equilibrium characteristics (state price density, market price of risk, risk premium, risk-free rate) in a heterogeneous beliefs framework and to analyze the impact of belief heterogeneity. We prove that in many cases, the impact of belief heterogeneity on the market price of risk can be easily estimated, with a relatively good precision, by considering the wealth-weighted average belief. The introduction of a discount factor in the aggregation procedure appears to be related to the interpretation of the heterogeneity of beliefs as a source of risk (see Cragg and Malkiel, 1982). However, our results permits us to explain why assets with higher belief dispersion have lower risk premia (Diether et al., 2002). Finally, we show that it is possible to construct specific parametrizations of the heterogeneous beliefs model that lead to globally higher risk premia, lower risk-free rates, and risk premia that are lower for assets with higher belief dispersion.

Suggested Citation

  • Elyès Jouini & Clotilde Napp, 2003. "Consensus consumer and intertemporal asset pricing with heterogeneous beliefs," Finance 0312001, EconWPA.
  • Handle: RePEc:wpa:wuwpfi:0312001
    Note: Type of Document - pdf; prepared on Win98; pages: 33
    as

    Download full text from publisher

    File URL: http://econwpa.repec.org/eps/fin/papers/0312/0312001.pdf
    Download Restriction: no

    Other versions of this item:

    More about this item

    Keywords

    Consensus consumer; representative agent; heterogeneous beliefs; CCAPM; risk premium puzzle; risk-free rate puzzle;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wpa:wuwpfi:0312001. 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: (EconWPA). General contact details of provider: http://econwpa.repec.org .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.