Asset pricing and institutional investors with disagreements

Chaoqun Ma, Hailong Wang, Fengchao Cheng and Duni Hu

Economic Modelling, 2017, vol. 64, issue C, 231-248

Abstract: We develop a dynamic asset pricing model with two institutional investors who have benchmark incentives and who disagree about the underlying economy. We derive semi-closed form expressions for all equilibrium quantities. We find that the benchmark stock price increases and the non-benchmark stock price decreases with the benchmark incentives. Furthermore, each stock price decreases with its own disagreement and increases with the other stock disagreement. We also show that there is a positive relationship between the co-movement of the stocks and the benchmark incentives, but that this co-movement is negative with the disagreements, owing to the endogenous risk-sharing mechanisms. Moreover, we find that, when one stock disagreement increases, the optimistic institutional investor always takes positions on this stock by shorting the other stock and the bond in order to hedge against the risk of market changes, in line with the pessimistic investor's beliefs.

JEL-codes: G11 G12 G23 (search for similar items in EconPapers)
Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:64:y:2017:i:c:p:231-248

DOI: 10.1016/j.econmod.2017.03.018

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