Asset Pricing In a World of Imperfect Foresight

37 Pages Posted: 18 Jun 2020

See all articles by Peter Bossaerts

Peter Bossaerts

University of Melbourne - Department of Finance; University of Cambridge

Felix Fattinger

WU Vienna University of Economics and Business

Frans van den Bogaerde

affiliation not provided to SSRN

Wenhao Yang

Chinese University of Hong Kong, Shenzhen

Date Written: May 26, 2020

Abstract

We consider a canonical asset pricing model, where agents with quadratic preferences are allowed to retrade a limited set of securities over multiple periods, after which these securities expire, and agents consume their liquidation values. A key assumption in this model is that agents have perfect foresight: for all future contingencies, they correctly foresee the corresponding equilibrium prices. We show that, under myopia, prices generically are as if agents had perfect foresight. Yet their choices are wrong, because of neglected re-trading opportunities. In an experiment, we find both prices and choices to be consistent with myopia.

Keywords: Rational Expectations, Perfect Foresight, Myopia, Experimental Finance

JEL Classification: D51, D84, G12, G14

Suggested Citation

Bossaerts, Peter L. and Fattinger, Felix and van den Bogaerde, Frans and Yang, Wenhao, Asset Pricing In a World of Imperfect Foresight (May 26, 2020). Available at SSRN: https://ssrn.com/abstract=3610634 or http://dx.doi.org/10.2139/ssrn.3610634

Peter L. Bossaerts (Contact Author)

University of Melbourne - Department of Finance ( email )

Faculty of Economics and Commerce
Department of Finance
Carlton, Victoria 3010
Australia

HOME PAGE: http://bmmlab.org

University of Cambridge ( email )

Trinity Ln
Cambridge, CB2 1TN
United Kingdom

Felix Fattinger

WU Vienna University of Economics and Business ( email )

Welthandelsplatz 1, Building D1, 3rd Floor
Vienna, 1020
Austria

Frans Van den Bogaerde

affiliation not provided to SSRN

Wenhao Yang

Chinese University of Hong Kong, Shenzhen ( email )

2001 Longxiang Road, Longgang District
Shenzhen, 518172
China

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