Consensus Consumer and Intertemporal Asset Pricing with Heterogeneous Beliefs

Elyès Jouini () and Clotilde NAPP

Open Access publications from Université Paris-Dauphine from Université Paris-Dauphine

Abstract: The aim of the paper is to analyze the impact of heterogeneous beliefs in an otherwise standard competitive complete market economy. The construction of a consensus probability belief, as well as a consensus consumer, are shown to be valid modulo an aggregation bias, which takes the form of a discount factor. In classical cases, the consensus probability belief is a risk tolerance weighted average of the individual beliefs, and the discount factor is proportional to beliefs dispersion. This discount factor makes the heterogeneous beliefs setting fundamentally different from the homogeneous beliefs setting, and it is consistent with the interpretation of beliefs heterogeneity as a source of risk. We then use our construction to rewrite in a simple way the equilibrium characteristics (market price of risk, risk premium, risk-free rate) in a heterogeneous beliefs framework and to analyze the impact of beliefs heterogeneity. Finally, we show that it is possible to construct specific parametrizations of the heterogeneous beliefs model that lead to globally higher risk premia, lower risk-free rates, and risk premia that are lower for assets with higher belief dispersion.

Keywords: Beliefs Heterogeneity; Consensus Consumer; Pessimism; Optimism; Risk Premium (search for similar items in EconPapers)
JEL-codes: G12 D41 D83 (search for similar items in EconPapers)
Date: 2007-10
References: View references in EconPapers View complete reference list from CitEc
Citations View citations in EconPapers (26) Track citations by RSS feed

Published in Review of Economic Studies (2007-10) v.74, p.1149-1174

Downloads: (external link)
http://basepub.dauphine.fr/xmlui/bitstream/123456789/78/1/Jouini_40.pdf (application/pdf)

Related works:
Journal Article: Consensus Consumer and Intertemporal Asset Pricing with Heterogeneous Beliefs (2007)
Working Paper: Consensus consumer and intertemporal asset pricing with heterogeneous beliefs (2007)
Working Paper: Consensus consumer and intertemporal asset pricing with heterogeneous beliefs (2003)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:ner:dauphi:urn:hdl:123456789/78

Access Statistics for this paper

More papers in Open Access publications from Université Paris-Dauphine from Université Paris-Dauphine
Series data maintained by Wendin-Malegdé Patrick Kaboré ().