Heterogenous Beliefs and Tests of Present Value Models

Kenneth Kasa (), Todd B. Walker and Charles H. Whiteman ()

Discussion Papers from Department of Economics, Simon Fraser University

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 additional dynamics of the heterogeneous beliefs equilibrium can account for observed violations of variance bounds, predictability of excess returns, and rejections of cross-equation restrictions.

Keywords: Heterogenous beliefs; Volatility (search for similar items in EconPapers)
JEL-codes: G12 D82 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge
Date: 2012-04
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