Heterogeneous beliefs and tests of present value models

Kenneth Kasa, Todd B. Walker, Charles H. Whiteman

Research output: Contribution to journalArticlepeer-review

17 Scopus citations


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.

Original languageEnglish (US)
Pages (from-to)1137-1163
Number of pages27
JournalReview of Economic Studies
Issue number3
StatePublished - Jul 2014

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics


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