We propose a continuous-time model of trading with heterogeneous beliefs. Risk-neutral agents face quadratic costs-of-carry on positions and thus their marginal valuation of the asset decreases with the size of their position, as it would be the case for risk-averse agents. In the equilibrium models of heterogeneous beliefs that followed the work by Harrison and Kreps, investors are risk-neutra...

Financial markets are overwhelmed by daily announcements. We use experimental asset markets to assess the impact of releasing public messages with different levels of reliability on asset prices. Subjects receive qualitative announcements in predetermined trading periods that are either preset by the experimenter, randomly selected, or determined by past asset market prices. We find that messag...

Relying on a present value model with time-varying expected returns, and incorporating a quite general class of processes to model bubble-like stock price deviations from the long-run equilibrium, we provide empirical evidence on the U.S. log dividend–price ratio over the 1871:1–2001:9 period, as well as for several sub-periods. The application of a momentum threshold autoregressive technique d...

We present a simple model of the macroeconomy that includes a role for an assetprice bubble, and derive optimal monetary policy settings for two policy-makers. The first policy-maker, a sceptic, does not attempt to forecast the future possible paths for the asset-price bubble when setting policy. The second policy-maker, an activist, takes into account the complete stochastic implications of th...

We investigate the generality of the bubble and crash price pattern observed in previous asset market experiments. The deviation of prices from fundamental values can be explained by either a failure of subjects to backward induct, a learning effect, or some other explanation. We conduct experiments with a longer horizon – 200 periods – to find a possible reason for the timing of the crash. If ...

We analyze a simple model of an asset market, in which a large rational trader interacts with ‘‘noise speculators’’ who seek short-run speculative gains, and become active following a prolonged episode of mispricing relative to the asset’s fundamental value. Themodel gives rise to price patterns such as bubble dynamics, positive short-run correlation and vanishing long-run correlation of price ...

Asset prices and returns are known to vary signi®cantly more than output or aggregate consumption growth, and an order of magnitude in excess of what is justi®ed by innovations to fundamentals. We study excess price volatility in a lifecycle economy with two assets (claims on capital and a public debt bubble), heterogeneous agents, and increasing returns to ®nancial intermediation. We show that...

This paper examines how an asset price is determined in a market, and how it changes as circumstances in the market change, making use of a standard asset price model. The motivation of the paper is to examine if the model can explain a bubble economy in which individuals are risk averse. It is known that if the relative risk aversion of an investor’s utility function does not exceed 1 and is n...

We develop a new asset price model where the dynamic structure of the asset price, after the fundamental value is removed, is subject to two different regimes. One regime reflects the normal period where the asset price divided by the dividend is assumed to follow a mean-reverting process around a stochastic long run mean. This latter is allowed to account for possible smooth structural change....