Asset Pricing In a World of Imperfect Foresight

Bossaerts, Peter; Fattinger, Felix; van den Bogaerde, Frans; Yang, Wenhao

doi:10.2139/ssrn.3610634

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

Felix Fattinger

University of Melbourne - Department of Finance

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: 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