Price Drift as an Outcome of Differences in Higher-Order Beliefs

Posted: 8 Sep 2009

See all articles by Snehal Banerjee

Snehal Banerjee

University of California, San Diego (UCSD) - Rady School of Management

Ron Kaniel

University of Rochester - Simon Business School; CEPR

Ilan Kremer

Independent

Multiple version iconThere are 2 versions of this paper

Date Written: September 2009

Abstract

Motivated by the insight of Keynes (1936) on the importance of higher-order beliefs in financial markets, we examine the role of such beliefs in generating drift in asset prices. We show that in a dynamic setting, a higher-order difference of opinions is necessary for heterogeneous beliefs to generate price drift. Such drift does not arise in standard difference of opinion models, since investors' beliefs are assumed to be common knowledge. Our results stand in contrast to those of Allen, Morris, and Shin (2006) and others, as we argue that in rational expectation equilibria, heterogeneous beliefs do not lead to price drift.

Keywords: G12

Suggested Citation

Banerjee, Snehal and Kaniel, Ron and Kremer, Ilan, Price Drift as an Outcome of Differences in Higher-Order Beliefs (September 2009). The Review of Financial Studies, Vol. 22, Issue 9, pp. 3707-3734, 2009. Available at SSRN: https://ssrn.com/abstract=1468201 or http://dx.doi.org/hhp014

Snehal Banerjee (Contact Author)

University of California, San Diego (UCSD) - Rady School of Management ( email )

9500 Gilman Drive
Rady School of Management
La Jolla, CA 92093
United States

Ron Kaniel

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

HOME PAGE: http://rkaniel.simon.rochester.edu

CEPR ( email )

London
United Kingdom

Ilan Kremer

Independent

No Address Available

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