Journal Article

Consensus Consumer and Intertemporal Asset Pricing with Heterogeneous Beliefs

Elyès Jouini and Clotilde Napp

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 74, issue 4, pages 1149-1174
Published in print October 2007 | ISSN: 0034-6527
Published online October 2007 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1111/j.1467-937X.2007.00439.x
Consensus Consumer and Intertemporal Asset Pricing with Heterogeneous Beliefs

More Like This

Show all results sharing these subjects:

  • Information, Knowledge, and Uncertainy
  • Economics
  • Market Structure and Pricing

GO

Show Summary Details

Preview

The aim of this paper is to analyse the impact of heterogeneous beliefs in an otherwise standard competitive complete market economy. The construction of a consensus probability belief, as well as a consensus consumer, is shown to be valid modulo an aggregation bias, which takes the form of a discount factor. In classical cases, the consensus probability belief is a risk tolerance weighted average of the individual beliefs, and the discount factor is proportional to beliefs dispersion. This discount factor makes the heterogeneous beliefs setting fundamentally different from the homogeneous beliefs setting, and it is consistent with the interpretation of beliefs heterogeneity as a source of risk.

We then use our construction to rewrite in a simple way the equilibrium characteristics (market price of risk, risk premium, risk-free rate) in a heterogeneous beliefs framework and to analyse the impact of beliefs heterogeneity. Finally, we show that it is possible to construct specific parametrizations of the heterogeneous beliefs model that lead to globally higher risk premia and lower risk-free rates.

Keywords: D41; D83; G12

Journal Article.  11440 words.  Illustrated.

Subjects: Information, Knowledge, and Uncertainy ; Economics ; Market Structure and Pricing

Full text: subscription required

How to subscribe Recommend to my Librarian

Users without a subscription are not able to see the full content. Please, subscribe or login to access all content.