An Examination of Heterogeneous Beliefs with a Short-Sale Constraint in a Dynamic Economy

Posted: 14 Jul 2008

See all articles by Michael F. Gallmeyer

Michael F. Gallmeyer

University of Virginia (UVA) - McIntire School of Commerce

Burton Hollifield

Carnegie Mellon University - David A. Tepper School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: 2008

Abstract

We study the effects of a market-wide short-sale constraint in a dynamic economy with heterogeneous beliefs. Imposing the constraint reduces the stock price if the optimistic investors' intertemporal elasticity of substitution (IES) is less than one and increases the stock price if the optimist's IES is greater than one. In calibrated examples, the optimist's market price of risk falls and the interest rate rises when the constraint binds. Imposing the constraint leads to a higher stock volatility if the optimist's IES is less than one and a lower stock volatility if the IES is greater than one.

Keywords: D51, G11, G12, G14

Suggested Citation

Gallmeyer, Michael F. and Hollifield, Burton, An Examination of Heterogeneous Beliefs with a Short-Sale Constraint in a Dynamic Economy (2008). Review of Finance, Vol. 12, Issue 2, pp. 323-364, 2008. Available at SSRN: https://ssrn.com/abstract=1159632 or http://dx.doi.org/10.1093/rof/rfm036

Michael F. Gallmeyer (Contact Author)

University of Virginia (UVA) - McIntire School of Commerce ( email )

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Burton Hollifield

Carnegie Mellon University - David A. Tepper School of Business ( email )

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Pittsburgh, PA 15213-3890
United States
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(412) 268-6837 (Fax)

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