Asset Prices in a Time Series Model with Perpetually Disparately Informed, Competitive Traders

34 Pages Posted: 26 Sep 2006

See all articles by Kenneth Kasa

Kenneth Kasa

Simon Fraser University (SFU) - Department of Economics

Todd B. Walker

Indiana University Bloomington - Department of Economics

Charles H. Whiteman

Pennsylvania State University - Smeal College of Business

Date Written: September 22, 2006

Abstract

This paper develops a dynamic asset pricing model with persistent heterogeneous beliefs. The model features competitive traders who receive idiosyncratic signals about an underlying fundamentals process. We adapt Futia's (1981) frequency domain methods to derive conditions on the fundamentals that guarantee noninvertibility of the mapping between observed market data and the underlying shocks to agents' information sets. When these conditions are satisfied, agents must 'forecast the forecasts of others'. The paper provides an explicit analytical characterization of the resulting higher-order belief dynamics. These additional dynamics can explain apparent violations of variance bounds and rejections of cross-equation restrictions.

Keywords: Asymmetric Information, Blaschke Factors

JEL Classification: G12, D82

Suggested Citation

Kasa, Kenneth and Walker, Todd B. and Whiteman, Charles H., Asset Prices in a Time Series Model with Perpetually Disparately Informed, Competitive Traders (September 22, 2006). CAEPR Working Paper No. 2006-010. Available at SSRN: https://ssrn.com/abstract=932693 or http://dx.doi.org/10.2139/ssrn.932693

Kenneth Kasa

Simon Fraser University (SFU) - Department of Economics ( email )

8888 University Drive
Burnaby, British Columbia V5A 1S6
Canada

Todd B. Walker (Contact Author)

Indiana University Bloomington - Department of Economics ( email )

Wylie Hall
Bloomington, IN 47405-6620
United States

Charles H. Whiteman

Pennsylvania State University - Smeal College of Business

University Park, PA 16802
United States
814-863-0448 (Phone)

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
818
Abstract Views
3,755
rank
30,124
PlumX Metrics