Wealth Dynamics in a Bond Economy with Heterogeneous Beliefs

47 Pages Posted: 9 Apr 2015

See all articles by Timothy Cogley

Timothy Cogley

Leonard N. Stern School of Business - Department of Economics

Thomas J. Sargent

New York University (NYU) - Department of Economics, Leonard N. Stern School of Business; National Bureau of Economic Research (NBER)

Viktor Tsyrennikov

Cornell University - Department of Economics

Date Written: November 20, 2013

Abstract

Two types of agents have diverse beliefs about the law of motion for an exogenous endowment. One type knows the true law of motion and the other learns about it via Bayes’ theorem. Financial market structure affects the dynamics of the distribution of financial wealth. When markets are complete, the learning agent loses wealth, as in Blume and Easley (2006). The absence of markets for some Arrow securities alters the direction in which wealth is transferred relative to a complete markets economy. In an economy in which only a risk-free bond is traded, the learning agent accumulates wealth, both agents survive asymptotically, and the more knowledgeable agent is driven to his debt limit.

Keywords: Wealth dynamics, survival, incomplete markets, diverse beliefs, learning

JEL Classification: D52, D53, D83, D84

Suggested Citation

Cogley, Timothy and Sargent, Thomas J. and Tsyrennikov, Viktor, Wealth Dynamics in a Bond Economy with Heterogeneous Beliefs (November 20, 2013). Bank of Korea WP 2013-23, Available at SSRN: https://ssrn.com/abstract=2579548 or http://dx.doi.org/10.2139/ssrn.2579548

Timothy Cogley

Leonard N. Stern School of Business - Department of Economics ( email )

269 Mercer Street
New York, NY 10003
United States
530-752-1581 (Phone)
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Thomas J. Sargent (Contact Author)

New York University (NYU) - Department of Economics, Leonard N. Stern School of Business ( email )

269 Mercer Street
New York, NY 10003
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National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
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Viktor Tsyrennikov

Cornell University - Department of Economics ( email )

Ithaca, NY
United States

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