Heterogeneous Beliefs and Asset Pricing in Discrete Time: An Analysis of Pessimism and Doubt

36 Pages Posted: 16 Jul 2006

See all articles by Clotilde Napp

Clotilde Napp

CNRS and Université Paris-Dauphine

Elyes Jouini

Univ. Paris Dauphine - CEREMADE

Abstract

The aim of the paper is to analyze the impact of heterogeneous beliefs in an otherwise standard competitive complete markets discrete time economy. The construction of a consensus belief, as well as a consensus consumer are shown to be valid modulo a predictable aggregation bias, which takes the form of a discount factor. We use our construction of a consensus consumer to investigate the impact of beliefs heterogeneity on the CCAPM and on the expression of the risk free rate. We focus on the pessimism/doubt of the consensus consumer and we study their impact on the equilibrium characteristics (market price of risk, risk free rate). We finally analyze how pessimism and doubt at the aggregate level result from pessimism and doubt at the individual level.

Suggested Citation

Napp, Clotilde and Jouini, Elyes, Heterogeneous Beliefs and Asset Pricing in Discrete Time: An Analysis of Pessimism and Doubt. Journal of Economic Dynamics and Control, Vol. 30, pp. 1233-1260, 2006. Available at SSRN: https://ssrn.com/abstract=915366

Clotilde Napp (Contact Author)

CNRS and Université Paris-Dauphine ( email )

Place de Lattre de Tassigny
Paris, 75775
France

Elyes Jouini

Univ. Paris Dauphine - CEREMADE ( email )

Place du Marechal de Lattre de Tassigny
Paris Cedex 16, 75775
France
+ 33 1 44 05 46 75 (Phone)
+ 33 1 44 05 45 99 (Fax)

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