Dynamic higher order expectations

Kristoffer Nimark ()

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

Abstract: In models where privately informed agents interact, agents may need to form higher order expectations, i.e. expectations of other agents' expectations. This paper develops a tractable framework for solving and analyzing linear dynamic rational expectations models in which privately informed agents form higher order expectations. The framework is used to demonstrate that the well-known problem of the infinite regress of expectations identified by Townsend (1983) can be approximated to an arbitrary accuracy with a finite dimensional representation under quite general conditions. The paper is constructive and presents a fixed point algorithm for finding an accurate solution and provides weak conditions that ensure that a fixed point exists. To help intuition, Singleton's (1987) asset pricing model with disparately informed traders is used as a vehicle for the paper.

Keywords: Dynamic Higher Order Expectations; Private Information; Asset Pricing (search for similar items in EconPapers)
Date: 2007-10, Revised 2011-03
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Citations: View citations in EconPapers (43)

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Related works:
Working Paper: Dynamic Higher Order Expectations (2017)
Working Paper: Dynamic Higher Order Expectations (2017)
Working Paper: Dynamic Higher Order Expectations (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:upf:upfgen:1118

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