Consensus consumer and intertemporal asset pricing with heterogeneous beliefs
نویسندگان
چکیده
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 probability belief, as well as a consensus consumer, are shown to be valid modulo an aggregation bias, which takes the form of a discount factor. In classical cases, the consensus probability belief is a risk tolerance weighted average of the individual beliefs, and the discount factor is proportional to beliefs dispersion. This discount factor makes the heterogeneous beliefs setting fundamentally di¤erent from the homogeneous beliefs setting, and it is consistent with the interpretation of beliefs heterogeneity as a source of risk. We then use our construction to rewrite in a simple way the equilibrium characteristics (market price of risk, risk premium, risk-free rate) in a heterogeneous beliefs framework and to analyze the impact of beliefs heterogeneity. Finally, we show that it is possible to construct speci c parametrizations of the heterogeneous beliefs model that lead to globally higher risk premia and lower risk-free rates. JEL numbers: G10, G12, D84
منابع مشابه
Consensus Investor and Intertemporal Asset Pricing with Heterogeneous Beliefs
This paper considers an intertemporal capital market with an arbitrary number of heterogeneous belief investors who maximise the expected utilities of their terminal wealths under their subject beliefs. By aggregating the heterogeneous beliefs of the investors, a consensus investor is constructed to characterise the market equilibrium under the heterogeneous beliefs. Applying this idea to logar...
متن کاملStrategic asset allocation with heterogeneous beliefs
We study how the presence of long term investors using di¤erent return forecasting strategies and switching them based on their past performance generates the price trends observed in nancial markets. In the empirical section, we assume that investors choose how to allocate their portfolios among four major stock indices: Dow Jones, FTSE, Nikkei and Hang Seng. The exercise shows that a decreas...
متن کاملA Binomial Model of Asset and Option Pricing with Heterogeneous Beliefs
This paper provides a theoretical framework for pricing assets in a multiperiod economy with heterogeneous beliefs. The stock price dynamics follow a binomial lattice structure. Agents are allowed to differ in their beliefs of the probability and asset return in each state of nature. By constructing a consensus belief, we examine the impact of heterogeneous beliefs on market equilibrium. Static...
متن کاملConsumption-Based Asset Pricing with Recursive Utility
In this paper it has been attempted to investigate the capability of the consumption-based capital asset pricing model (CCAPM), using the general method of moment (GMM), with regard to the Epstien-zin recursive preferences model for Iran's capital market. Generally speaking, recursive utility permits disentangling of the two psychologically separate concepts of risk aversion and elasticity of i...
متن کاملAre stock markets really like beauty contests? An asset pricing model with higher order beliefs and its empirical evidence
The goal of this paper is to assess, for the first time, the empirical impact of ”Keynes’ beauty contest”, or ”higher order beliefs”, on asset price volatility. The paper shows that heterogeneous expectations induce higher order beliefs and that asset pricing models with heterogeneous expectations theoretically generate more volatility than rational expectation models. The paper also explains h...
متن کامل