Higher Order Beliefs and the Comovement of Asset Prices | Zendy

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Higher Order Beliefs and the Comovement of Asset Prices

Author(s) -

Christian Grisse

Publication year - 2009

Publication title -

ssrn electronic journal

Language(s) - English

Resource type - Journals

ISSN - 1556-5068

DOI - 10.2139/ssrn.1101328

Subject(s) - order (exchange) , economics , asset (computer security) , monetary economics , financial economics , capital asset pricing model , econometrics , business , finance , computer science , computer security

Asset price correlations are often thought to be larger than justi…ed by economic fundamentals. This paper shows that such ‘excessive’comovement can be explained by introducing higher order beliefs - investors’beliefs about the beliefs of other investors - into an otherwise standard asset pricing model. Compared to expectations of fundamentals, expectations of other investors’expectations of fundamentals place more weight on public information. In a

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