Heterogeneous beliefs with information processing capacity constraints and asset pricing in a monetary economy

Hailong Wang and Duni Hu

The North American Journal of Economics and Finance, 2024, vol. 72, issue C

Abstract: This paper proposes a monetary model to explore the influences of heterogeneous beliefs and information processing capacity constraints on the dynamics of asset prices. The capacity constraints not only influence the estimations of the capacity constrained investor, but also generate persistent disagreements among the investors. The model implies that reducing the levels of capacity constraints can alleviate the influences of heterogeneous beliefs and helps to stabilize financial markets. The model also reveals that introducing heterogeneous beliefs about both real and nominal sectors not only leads the stock with low monetary policy exposure to have significantly higher average return than the stock with high monetary policy exposure, but also can explain the mixed results about the relationship between the volatility and the risk premium of the aggregate stock market.

Keywords: Heterogeneous beliefs; Capacity constraints; Asset pricing; Risk premium; Portfolio plan (search for similar items in EconPapers)
JEL-codes: D51 D53 D91 G11 G12 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:72:y:2024:i:c:s1062940824000688

DOI: 10.1016/j.najef.2024.102143

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