TY - JOUR
T1 - Heterogeneous beliefs and tests of present value models
AU - Kasa, Kenneth
AU - Walker, Todd B.
AU - Whiteman, Charles H.
N1 - Funding Information:
Acknowledgments. We would like to thank Imran Rasul and four anonymous referees for very useful comments and suggestions. We would also like to thank Tim Cogley, Martin Evans, Ron Michener, Bart Taub, Tom Sargent, Pierre-Olivier Weill and seminar participants at NYU, the Federal Reserve Board, UC Berkeley, UC Davis, UC Santa Barbara, UC Santa Cruz, Indiana University, VPI, UNC, and the Atlanta Fed for helpful discussions. Support from the National Science Foundation under grant SES85-10505 and SES–0962221 is gratefully acknowledged. This article subsumes and extends Walker and Whiteman’s Equilibrium Volatility and Heterogeneity in a Simple Asset Pricing Model and Kasa’s Asset Pricing with Heterogeneous Beliefs: A Frequency Domain Approach.
PY - 2014/7
Y1 - 2014/7
N2 - This article 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 non-invertibility of the mapping between observed market data and the underlying shocks to agents' information sets. When these conditions are satisfied, agents remain asymmetrically informed in equilibrium and must 'forecast the forecasts of others'. An econometrician, who incorrectly imposes a homogeneous beliefs equilibrium, will find that the asset price displays violations of variance bounds, predictability of excess returns, and rejections of cross-equation restrictions.
AB - This article 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 non-invertibility of the mapping between observed market data and the underlying shocks to agents' information sets. When these conditions are satisfied, agents remain asymmetrically informed in equilibrium and must 'forecast the forecasts of others'. An econometrician, who incorrectly imposes a homogeneous beliefs equilibrium, will find that the asset price displays violations of variance bounds, predictability of excess returns, and rejections of cross-equation restrictions.
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U2 - 10.1093/restud/rdt051
DO - 10.1093/restud/rdt051
M3 - Article
AN - SCOPUS:84905170809
SN - 0034-6527
VL - 81
SP - 1137
EP - 1163
JO - Review of Economic Studies
JF - Review of Economic Studies
IS - 3
ER -