Abstract

https://ssrn.com/abstract=891194
 
 

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Price Drift as an Outcome of Differences in Higher Order Beliefs


Snehal Banerjee


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

Ron Kaniel


University of Rochester - Simon Business School; CEPR

Ilan Kremer


Independent

May 2008

AFA 2007 Chicago Meetings Paper
Review of Financial Studies, Forthcoming

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.

Number of Pages in PDF File: 25

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


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Date posted: March 16, 2006 ; Last revised: November 30, 2009

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

Contact Information

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
Feedback to SSRN


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