'Nobody is Perfect': Asset Pricing and Long-Run Survival When Heterogeneous Investors Exhibit Different Kinds of Filtering Errors

SAFE Working Paper No. 114

69 Pages Posted: 12 Aug 2015

See all articles by Nicole Branger

Nicole Branger

University of Muenster - Finance Center Muenster

Christian Schlag

Goethe University Frankfurt - Research Center SAFE

Lue Wu

Goethe University Frankfurt - Department of Finance

Date Written: July 31, 2015

Abstract

In this paper we analyze an economy with two heterogeneous investors who both exhibit misspecified filtering models for the unobservable expected growth rate of the aggregated dividend. A key result of our analysis with respect to long-run investor survival is that there are degrees of model misspecification on the part of one investor for which there is no compensation by the other investor's deficiency. The main finding with respect to the asset pricing properties of our model is that the two dimensions of asset pricing and survival are basically independent. In scenarios when the investors are more similar with respect to their expected consumption shares, return volatilities can nevertheless be higher than in cases when they are very different.

Keywords: General Equilibrium, Asset Allocation, Learning, Different Beliefs, Over-Confidence

JEL Classification: G11, G12

Suggested Citation

Branger, Nicole and Schlag, Christian and Wu, Lue, 'Nobody is Perfect': Asset Pricing and Long-Run Survival When Heterogeneous Investors Exhibit Different Kinds of Filtering Errors (July 31, 2015). SAFE Working Paper No. 114. Available at SSRN: https://ssrn.com/abstract=2642274 or http://dx.doi.org/10.2139/ssrn.2642274

Nicole Branger

University of Muenster - Finance Center Muenster ( email )

Universitatsstr. 14-16
Muenster, 48143
Germany
+49 251 83 29779 (Phone)
+49 251 83 22867 (Fax)

HOME PAGE: http://www.wiwi.uni-muenster.de/fcm/fcm/das-finance-center/details.php?weobjectID=162

Christian Schlag (Contact Author)

Goethe University Frankfurt - Research Center SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany
+49 69 798 33699 (Phone)

Lue Wu

Goethe University Frankfurt - Department of Finance ( email )

Mertonstr. 17-21/Uni-Postbox 77
Frankfurt am Main, 60054
Germany
+49 69 798 28459 (Phone)
+49 69 798 22788 (Fax)

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