Modelling Asset Prices under Heterogeneous Beliefs

28 Pages Posted: 16 Oct 2019 Last revised: 27 Jul 2020

See all articles by Ryan Anderson

Ryan Anderson

University of Melbourne - Department of Finance

Peter Bossaerts

University of Cambridge

Date Written: June 7, 2020

Abstract

Asset pricing theorists have recently started to study the market impact of differences in beliefs among participants. The analysis is often carried out in the framework of Radner's perfect foresight ('rational expectations') equilibrium. Here, we study when this makes sense. In particular, we are concerned about clashes between perfect foresight (of future prices) and participants' own beliefs. Is it possible that perfect foresight may reveal to a participant that her beliefs are wrong? We show that a sufficient condition to avoid such clashes is if higher-order beliefs (about other participants' beliefs) are correct.

Keywords: Perfect Foresight, Rational Expectations Equilibrium, Heterogeneous Beliefs, Higher-Order Beliefs

JEL Classification: D53, G12, D84

Suggested Citation

Anderson, Ryan and Bossaerts, Peter L., Modelling Asset Prices under Heterogeneous Beliefs (June 7, 2020). Available at SSRN: https://ssrn.com/abstract=3465423 or http://dx.doi.org/10.2139/ssrn.3465423

Ryan Anderson (Contact Author)

University of Melbourne - Department of Finance ( email )

2 Arnold St.
Brunswick East, Victoria 3057
Australia

Peter L. Bossaerts

University of Cambridge ( email )

Faculty of Economics
Cambridge, CB3 9DD
United Kingdom

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