An intertemporal capital asset pricing model under heterogeneous beliefs |
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| Authors: | Son-Nan Chen |
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| Affiliation: | 1. Son-Nan Chen is Professirif Finance at The University of Maryland at College Park, USA;1. Department of Economics, University of Basel, Switzerland, and Federal Reserve Bank of St.Louis, USA;2. Department of Economics, University of California, Irvine, Experimental Social Science Laboratory, USA;3. Department of Economics, University of California, Irvine, USA;1. Department of Political Science, Yale University, New Haven, CT, USA;2. Department of Statistics, Yale University, New Haven, CT, USA;3. Department of Mathematics, Program in Applied Mathematics, Yale University, New Haven, CT, USA;4. Department of Mathematics, Yale University, New Haven, CT, USA |
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| Abstract: | An intertemporal CAMP under heterogeneous beliefs is derived. It is shown that an asset's risk consists of three components: the market consensus of volatility risk, the market consensus of the risk induced by changes in the investment opportunity set, and risk associated with uncertain shifts in investor's subjective expectations. The multiperiod market price of risk with heterogeneous beliefs defines a new structure of market risk that captures contemporaneous changes in investors' subjective expectations and the dynamics of the investment opportunity set. The investors' demand for risky assets also is examined under heterogeneous belief. In addition, the model derived provides a generalized version of other CAPM's, such as the classical CAPM, Merton's intertemporal CAPM, and Bredeen's consumption-based CAPM. |
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