Asset Prices with Heterogenous Beliefs

Suleyman Basak

No 4256, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This article studies the dynamic behaviour of security prices in the presence of investors? heterogeneous beliefs. We provide a tractable continuous-time pure-exchange model and highlight the mechanism through which investors? differences of opinion enter into security prices. In the determination of equilibrium, we employ a representative investor with stochastic weights and solve for all economic quantities in closed form, including the perceived market prices of risk and interest rate. The basic analysis is generalized to incorporate multiple sources of risk, disagreement about non-fundamentals, and multiple investors. Other applications involving multiple goods and nominal asset pricing within monetary economies are discussed.

Keywords: C60; Heterogenous beliefs; Asset pricing; Equilibrium; Market price of risk; Survey (search for similar items in EconPapers)
JEL-codes: D50 D90 G12 (search for similar items in EconPapers)
Date: 2004-02
New Economics Papers: this item is included in nep-cfn, nep-fin and nep-mic
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