Unbiased Disagreement in financial markets, waves of pessimism and the risk return tradeoff

Elyès Jouini () and Clotilde Napp

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Abstract: Can investors with irrational beliefs be neglected as long as they are rational on average ? Do their trades cancel out with no consequences on prices, as implicitly assumed by traditional models? We consider a model with irrational investors, who are rational on average. We obtain waves of pessimism and optimism that lead to countercyclical market prices of risk and procyclical risk-free rates. The variance of the state price density is greatly increased. The long run risk-return relation is mod- i ed; in particular, the long run market price of risk might be higher than both the instantaneous and the rational ones.

Keywords: irrational investors; rational on average (search for similar items in EconPapers)
Date: 2010
Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00488481v1
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Citations: View citations in EconPapers (10)

Published in Review of Finance, 2010, (to appear)

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Journal Article: Unbiased Disagreement in Financial Markets, Waves of Pessimism and the Risk-Return Trade-off (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:halshs-00488481

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