DP4256 Asset Prices with Heterogenous Beliefs

Author(s): Suleyman Basak
Publication Date: February 2004
Keyword(s): asset pricing, C60, equilibrium, heterogenous beliefs, market price of risk, survey
JEL(s): D50, D90, G12
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=4256

This article studies the dynamic behaviour 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 non-fundamentals, and multiple investors. Other applications involving multiple goods and nominal asset pricing within monetary economies are discussed.