Asset Pricing with Heterogeneous Beliefs

Posted: 19 Jul 2005

See all articles by Suleyman Basak

Suleyman Basak

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

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Abstract

This article studies the dynamic behavior 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 nonfundamentals, and multiple investors. Other applications involving multiple goods and nominal asset pricing within monetary economies are discussed.

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

JEL Classification: C60, D50, D90, G12

Suggested Citation

Basak, Suleyman, Asset Pricing with Heterogeneous Beliefs. Journal of Banking and Finance, 2005. Available at SSRN: https://ssrn.com/abstract=757904

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Centre for Economic Policy Research (CEPR)

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