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Asset pricing with heterogeneous beliefs and relative performance

Shiyang Huang, Zhigang Qiu, Qi Shang and Ke Tang ()

Journal of Banking & Finance, 2013, vol. 37, issue 11, 4107-4119

Abstract: We propose an equilibrium asset pricing model in which agents with heterogeneous beliefs care about relative performance. We find that the concern with relative performance leads agents to trade more similarly, a development that has two effects. First, similar trading directly decreases volatility. Second, similar trading decreases the impact of dominant agents. The second effect dominates the first when agents expect large differences between their final performances, and vice versa when agents expect small differences between their final performances. Compared with the case in which agents are unconcerned about relative performance, the stock return volatility is higher when the second effect dominates, and lower when the first effect dominates. This paper also demonstrates that the concern about relative performance influences investors’ holdings, stock prices and risk premia.

Keywords: Relative performance; Fund managers; Asset pricing; Heterogeneous beliefs (search for similar items in EconPapers)
JEL-codes: G11 G12 (search for similar items in EconPapers)
Date: 2013
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