Asset Pricing Under Heterogeneous Information

59 Pages Posted: 22 Mar 2010

See all articles by Weiyang Qiu

Weiyang Qiu

MIT - Sloan School of Management

Jiang Wang

Massachusetts Institute of Technology (MIT) - Sloan School of Management; China Academy of Financial Research (CAFR); National Bureau of Economic Research (NBER)

Date Written: March 17, 2010

Abstract

In an asset market where agents have heterogeneous information, asset prices not only depend their expectations of the true fundamentals but also depend on their expectations of the expectations of others.

Iterations of such expectations lead to the so-called "infinite regress'' problem, which makes the analysis of asset pricing under heterogeneous information challenging. In this paper, we solve the infinite-regress problem in a simple economic setting under a fairly general information structure. This allows us to examine how different forms of information heterogeneity impacts the behavior of asset prices, their return dynamics, trading volume as well as agents' welfare. We find that in general current prices exhibit long-range dependence on past shocks. Moreover, we show that information heterogeneity tends to lower the level of asset prices, increase price volatility and return variability, and reduce trading volume. It also tends to decrease agents' welfare, including those with superior information.

Suggested Citation

Qiu, Weiyang and Wang, Jiang, Asset Pricing Under Heterogeneous Information (March 17, 2010). Available at SSRN: https://ssrn.com/abstract=1573423 or http://dx.doi.org/10.2139/ssrn.1573423

Weiyang Qiu

MIT - Sloan School of Management ( email )

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Jiang Wang (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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China Academy of Financial Research (CAFR)

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National Bureau of Economic Research (NBER)

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