Consensus Consumer and Intertemporal Asset Pricing with Heterogeneous Beliefs
Universite de Paris 9 Dauphine - CEREMADE
Université Paris-Dauphine - CNRS-DRM
March 11, 2008
The aim of the paper is to analyze the impact of heterogeneous beliefs in an otherwise standard competitive complete market economy. The construction of a consensus probability belief, as well as a consensus consumer, are shown to be valid modulo an aggregation bias, which takes the form of a discount factor. In classical cases, the consensus probability belief is a risk-tolerance weighted average of the individual beliefs, and the discount factor is proportional to the beliefs dispersion. This discount factor makes the heterogeneous beliefs setting fundamentally different from the homogeneous beliefs setting, and it is consistent with the interpretation of belief heterogeneity as a source of risk.
We then use our construction to rewrite in a simple way the equilibrium characteristics (market price of risk, risk premium, risk-free rate) in a heterogeneous beliefs framework and to analyze the impact of belief heterogeneity. Finally, we show that it is possible to construct specific parametrizations of the heterogeneous beliefs model that lead to globally higher risk premia, lower risk-free rates, and risk premia that are lower for assets with higher belief dispersion.
Number of Pages in PDF File: 42
Keywords: Risk premium, beliefs heterogeneity, optimism, pessimism, consensus consumer
JEL Classification: G10, G12, D84working papers series
Date posted: July 15, 2006 ; Last revised: December 7, 2009
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo3 in 0.391 seconds