Asset Prices with Heterogenous Beliefs

35 Pages Posted: 24 Mar 2004

See all articles by Suleyman Basak

Suleyman Basak

London Business School; Centre for Economic Policy Research (CEPR)

Date Written: February 2004

Abstract

This article studies the dynamic behaviour of security prices in the presence of investors' heterogeneous beliefs. We provide a tractable continuous-time pure-exchange model and highlight the mechanism through which investors' differences of opinion enter into security prices. In the determination of equilibrium, we employ a representative investor with stochastic weights and solve for all economic quantities in closed form, including the perceived market prices of risk and interest rate. The basic analysis is generalized to incorporate multiple sources of risk, disagreement about non-fundamentals, and multiple investors. Other applications involving multiple goods and nominal asset pricing within monetary economies are discussed.

Keywords: Heterogenous beliefs, asset pricing, equilibrium, market price of risk, survey

JEL Classification: C60, D50, D90, G12

Suggested Citation

Basak, Suleyman, Asset Prices with Heterogenous Beliefs (February 2004). CEPR Discussion Paper No. 4256. Available at SSRN: https://ssrn.com/abstract=510362

Suleyman Basak (Contact Author)

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Centre for Economic Policy Research (CEPR)

London
United Kingdom

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