Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5091477 | Journal of Banking & Finance | 2005 | 33 Pages |
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.
Related Topics
Social Sciences and Humanities
Economics, Econometrics and Finance
Economics and Econometrics
Authors
Suleyman Basak,