Speculative trading with rational beliefs and endogenous uncertainty

Ho-Mou Wu () and Wen-Chung Guo

Economic Theory, 2003, vol. 21, issue 2, 263-292

Abstract: This paper introduces the framework of rational beliefs of Kurz (1994), which makes the assumptions of heterogeneous beliefs of Harrison and Kreps (1978) and Morris (1996) more plausible. Agents hold diverse beliefs that are “rational” in the sense of being compatible with ample observed data. In a non-stationary environment the agents only learn about the stationary measure of observed data, but their beliefs can remain non-stationary and diverse. Speculative trading then stems from disagreements among traders. In a Markovian framework of dividends and beliefs, we obtain analytical results to show how the speculative premium depends on the extent of heterogeneity of beliefs. In addition, we demonstrate that there exists a unique Rational Belief Equilibrium (RBE) generically with endogenous uncertainty (as defined by Kurz and Wu, 1996) and that the RBE price is higher than the rational expectation equilibrium price (REE) under some general conditions Copyright Springer-Verlag Berlin Heidelberg 2003

Keywords: Keywords and Phrases: Speculation; Asset pricing; Rational beliefs; Endogenous uncertainty.; JEL Classification Numbers: D84; G12. (search for similar items in EconPapers)
Date: 2003
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Citations: View citations in EconPapers (23)

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DOI: 10.1007/s00199-002-0303-x

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