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Incomplete Information , Heterogeneity and Asset Pricing
| Content Provider | Semantic Scholar |
|---|---|
| Author | Berrada, Tony |
| Copyright Year | 2004 |
| Abstract | We consider a pure exchange economy where the drift of aggregate consumption is unobservable. Agents with heterogeneous beliefs and preferences act competitively on a financial and good markets. We discuss how equilibrium market prices of risk differ across agents, and in particular we discuss the properties of the market price of risk under the physical (objective) probability measure. We provide a number of specification of risk aversions and beliefs where the market price of risk is much higher, and the riskless rate of return lower, than in the equivalent full information economy (homogeneous and heterogeneous preferences) and thus could provide an(other) answer to the equity premium and risk free rate puzzles. We also provide a representation of the equilibrium volatility and numerically assess the role of heterogeneity in beliefs. We show that high level of stock volatility can be obtained with low level of aggregate consumption volatility when beliefs are heterogeneous. Finally we discuss how incomplete information may explain the apparent predictability in stock return, and show that in-sample predictability can not be exploited by the agents, as it is in fact a result of their learning processes. JEL classification G12 ∗Ecole des Hautes Études Commerciales Finance Department 3000, chemin de la CôteSainte-Catherine Montréal (Québec) Canada H3T 2A7 tony.berrada@hec.ca fax: (514) 340 5632 phone: (514) 340 6114. I am grateful to Marc Chesney, Jérôme Detemple, Rajna Gibson, Henri Loubergé, Elu Von-Thadden, seminar participants at the University of Geneva, Boston University, HEC Montreal, the 2002 European Winter Meeting of the Econometric Society and the 2003 Optimization Days for their comments. This article is based on the doctoral dissertation by Berrada at HEC Lausanne (2001). This research has been supported by the Swiss National Science Foundation and IFM2. |
| File Format | PDF HTM / HTML |
| Alternate Webpage(s) | http://neumann.hec.ca/pages/tony.berrada/heterogeneity.pdf |
| Language | English |
| Access Restriction | Open |
| Subject Keyword | Aggregate data Aversion (finding) CRC-based framing Catherine Diethylstilbestrol Fax Genetic Heterogeneity High-level programming language Kind of quantity - Equilibrium Linear algebra Numerical analysis Partial Pessimism Risk aversion Sample Variance Shadow volume Vergence Volatility |
| Content Type | Text |
| Resource Type | Article |
