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http://ssrn.com/abstract=932693
 
 

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Asset Prices in a Time Series Model with Perpetually Disparately Informed, Competitive Traders


Kenneth Kasa


Simon Fraser University (SFU) - Department of Economics

Todd B. Walker


Indiana University Bloomington - Department of Economics

Charles H. Whiteman


University of Iowa - Henry B. Tippie College of Business - Department of Economics

September 22, 2006

CAEPR Working Paper No. 2006-010

Abstract:     
This paper develops a dynamic asset pricing model with persistent heterogeneous beliefs. The model features competitive traders who receive idiosyncratic signals about an underlying fundamentals process. We adapt Futia's (1981) frequency domain methods to derive conditions on the fundamentals that guarantee noninvertibility of the mapping between observed market data and the underlying shocks to agents' information sets. When these conditions are satisfied, agents must 'forecast the forecasts of others'. The paper provides an explicit analytical characterization of the resulting higher-order belief dynamics. These additional dynamics can explain apparent violations of variance bounds and rejections of cross-equation restrictions.

Number of Pages in PDF File: 34

Keywords: Asymmetric Information, Blaschke Factors

JEL Classification: G12, D82

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Date posted: September 26, 2006  

Suggested Citation

Kasa, Kenneth and Walker, Todd B. and Whiteman , Charles H., Asset Prices in a Time Series Model with Perpetually Disparately Informed, Competitive Traders (September 22, 2006). CAEPR Working Paper No. 2006-010. Available at SSRN: http://ssrn.com/abstract=932693 or http://dx.doi.org/10.2139/ssrn.932693

Contact Information

Kenneth Kasa
Simon Fraser University (SFU) - Department of Economics ( email )
8888 University Drive
Burnaby, British Columbia V5A 1S6
Canada
Todd B. Walker (Contact Author)
Indiana University Bloomington - Department of Economics ( email )
Bloomington, IN 47405-6620
United States

Charles H. Whiteman
University of Iowa - Henry B. Tippie College of Business - Department of Economics ( email )
108 Pappajohn Building
Iowa City, IA 52242
United States
319-335-0834 (Phone)
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