Bounded Rationality and Asset Pricing with Intermediate Consumption

Posted: 8 Dec 2009

See all articles by Tony Berrada

Tony Berrada

University of Geneva - Geneva Finance Research Institute (GFRI); Swiss Finance Institute

Abstract

We consider a pure exchange economy with incomplete information. Some agents display learning bias and over- or under-react to the arrival of new information. We show under which conditions biased agents survive over a finite horizon. We also study the distribution of irrational agents consumption shares. Irrational agents have a significant consumption share in the economy when (i) shocks are less persistent (ii) risk aversion is high (iii) volatility of aggregate consumption is high. We also show that agents impact on prices is increasing in their consumption share and conclude that biased agents can significantly influence equilibrium quantities.

JEL Classification: G12

Suggested Citation

Berrada, Tony, Bounded Rationality and Asset Pricing with Intermediate Consumption. Review of Finance, Vol. 13, No. 4, pp. 693-725, 2009. Available at SSRN: https://ssrn.com/abstract=1520343 or http://dx.doi.org/rfn022

Tony Berrada (Contact Author)

University of Geneva - Geneva Finance Research Institute (GFRI) ( email )

40 Boulevard du Pont d'Arve
Geneva 4, 1211
Switzerland

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

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