Asset pricing with heterogeneous beliefs |
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| Affiliation: | 1. University of Toronto, 105 St. George Street, Toronto, ON M5S 3E6, Canada;2. Collegio Carlo Alberto, Via Real Collegio, 30, 10024 Moncalieri (Torino), Italy;1. School of Economics and Management, Nanjing University of Science and Technology, Xiaolingwei 200, Xuanwu District, Nanjing 210094, China;2. Antai College of Economics and Management, Shanghai Jiao Tong University, China;3. Institute of Chinese Financial Studies, Southwestern University of Finance and Economics, Collaborative Innovation Center of Financial Security, Liutai Avenue 555, Wenjiang District, Chengdu 611130, China;4. Antai College of Economics and Management, Shanghai Jiao Tong University, China |
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| Abstract: | This paper studies the dynamic behavior of security prices in the presence of investors’ heterogeneous beliefs. We provide a tractable continuous-time pure-exchange model and highlight the mechanism through which investors’ differences of opinion enter into security prices. In the determination of equilibrium, we employ a representative investor with stochastic weights and solve for all economic quantities in closed form, including the perceived market prices of risk and interest rate. The basic analysis is generalized to incorporate multiple sources of risk, disagreement about nonfundamentals, and multiple investors. Other applications involving multiple goods and nominal asset pricing within monetary economies are discussed. |
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