Asset Prices in a Time Series Model with Perpetually Disparately Informed, Competitive Traders

Kenneth Kasa, Todd Walker and Charles Whiteman ()

No 2006-010, CAEPR Working Papers from Center for Applied Economics and Policy Research, Department of Economics, Indiana University Bloomington

Abstract: This paper develops a dynamic asset pricing model with persistent heterogeneous beliefs. The model features competitive traders who receive idiosyncratic signals about an underlying fundamentals process. We adapt Futia’s (1981) frequency domain methods to derive conditions on the fundamentals that guarantee noninvertibility of the mapping between observed market data and the underlying shocks to agents’ information sets. When these conditions are satisfied, agents must ‘forecast the forecasts of others’. The paper provides an explicit analytical characterization of the resulting higher-order belief dynamics. These additional dynamics can explain apparent violations of variance bounds and rejections of cross-equation restrictions.

Keywords: Asymmetric Information; Blaschke Factors (search for similar items in EconPapers)
JEL-codes: D82 G12 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2006-09
New Economics Papers: this item is included in nep-fin, nep-fmk and nep-for
References: View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:inu:caeprp:2006010

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