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Disagreement in a Multi‐Asset Market
Author(s) -
He XueZhong,
Shi Lei
Publication year - 2012
Publication title -
international review of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.489
H-Index - 18
eISSN - 1468-2443
pISSN - 1369-412X
DOI - 10.1111/j.1468-2443.2012.01153.x
Subject(s) - asset (computer security) , econometrics , economics , homogeneous , security market line , benchmark (surveying) , capital asset pricing model , risk premium , financial economics , computer science , mathematics , stock market , context (archaeology) , paleontology , computer security , geodesy , combinatorics , biology , geography
This paper provides a simple framework to study the effect of disagreement in a multi‐asset market equilibrium by considering two agents who disagree about expected returns, variances, and correlation of returns of two risky assets. When agents' subjective beliefs are characterized by mean preserving spreads of a benchmark homogeneous belief, we show that the effect of the disagreement does not cancel out in general and the effect in a multi‐asset market can be very different from a single asset market. In particular, the market risk premium can increase and the risk‐free rate can decrease significantly even when the market is overoptimistic and overconfident.