Incomplete Information and Heterogeneous Beliefs in Continuous-time Finance PDF Download
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Author: Alexandre C. Ziegler
Publisher: Springer Science & Business Media
ISBN: 3540247556
Category : Business & Economics
Languages : en
Pages : 205
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Book Description
After a brief review of the existing incomplete information literature, the effect of incomplete information on investors' exptected utility, risky asset prices, and interest rates is described. It is demonstrated that increasing the quality of investors' information need not increase their expected utility and the prices of risky assets. The impact of other factors is discussed in detail. It is also demonstrated that financial markets in general do not aggregate information efficiently, a fact that can explain the equity premium puzzle.
Author: Alexandre C. Ziegler
Publisher: Springer Science & Business Media
ISBN: 3540247556
Category : Business & Economics
Languages : en
Pages : 205
Get Book Here
Book Description
After a brief review of the existing incomplete information literature, the effect of incomplete information on investors' exptected utility, risky asset prices, and interest rates is described. It is demonstrated that increasing the quality of investors' information need not increase their expected utility and the prices of risky assets. The impact of other factors is discussed in detail. It is also demonstrated that financial markets in general do not aggregate information efficiently, a fact that can explain the equity premium puzzle.
Author:
Publisher:
ISBN:
Category :
Languages : en
Pages : 47
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Book Description
Author: Hao Sun
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Category :
Languages : en
Pages : 0
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Author: Richard R. Lindsey
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Category : Rational expectations (Economic theory)
Languages : en
Pages : 23
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Author: Laurent Calvet
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Category :
Languages : en
Pages : 73
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Author: Jörg Rieger
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Languages : en
Pages :
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Author: Scott Phillip Mason
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Category : Finance
Languages : en
Pages : 264
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Author: Xue-zhong He
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Category :
Languages : en
Pages :
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Author: Darrell Duffie
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Languages : en
Pages : 40
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Author: Tony Berrada
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Category :
Languages : en
Pages : 50
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Book Description
I consider a pure exchange economy where the growth rate of aggregate consumption is mean reverting and unobservable. Agents have heterogenous beliefs which they continuously update. I study the properties of asset prices as they can be measured by an outside observer (objective probability). First, it is shown that under the objective probability, the market price of risk (Sharpe ratio) is larger than the complete information equivalent, if the agents with higher level of expectations about the growth rate also have higher level of conditional variances. I provide an analytical formula for the volatility of the stock price which identifies the respective contributions of information incompleteness and heterogeneity in beliefs. It is shown that the volatility can be higher or lower than the complete information case, depending on the parametrization. I found that a parametric specification which yields a high level of volatility necessarily implies a negative covariance of the stock return with the interest rate. Finally I discuss why asset returns appear predictable in the objective probability measure when agents rationally update their beliefs by taking into account the observable variations of the dividend.
