Price Drift as an Outcome of Differences in Higher Order Beliefs

AFA 2007 Chicago Meetings Paper

Review of Financial Studies, Forthcoming

25 Pages Posted: 16 Mar 2006 Last revised: 30 Nov 2009

Snehal Banerjee

University of California, San Diego (UCSD) - Rady School of Management

Ron Kaniel

University of Rochester - Simon Business School; CEPR

Ilan Kremer

Independent

Multiple version iconThere are 2 versions of this paper

Date Written: May 2008

Abstract

Motivated by the insight of Keynes (1936) on the importance of higher order beliefs in financial markets, we examine the role of such beliefs in generating drift in asset prices. We show that in a dynamic setting, a higher order difference of opinions is necessary for heterogeneous beliefs to generate price drift. Such drift does not arise in standard difference of opinion models, since investors' beliefs are assumed to be common knowledge. Our results stand in contrast to Allen, Morris and Shin (2006) and others, as we argue that in rational expectation equilibria, heterogeneous beliefs do not lead to price drift.

Keywords: price drift, momentum, rational, difference, opinion

Suggested Citation

Banerjee, Snehal and Kaniel, Ron and Kremer, Ilan, Price Drift as an Outcome of Differences in Higher Order Beliefs (May 2008). AFA 2007 Chicago Meetings Paper. Available at SSRN: https://ssrn.com/abstract=891194

Snehal Banerjee

University of California, San Diego (UCSD) - Rady School of Management ( email )

9500 Gilman Drive
Rady School of Management
La Jolla, CA 92093
United States

Ron Kaniel (Contact Author)

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

HOME PAGE: http://rkaniel.simon.rochester.edu

CEPR ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Ilan Kremer

Independent

No Address Available

Paper statistics

Downloads
427
Rank
54,212
Abstract Views
1,931