Premium
Heterogeneous Beliefs and Learning about the Expected Return in a Market for a Short‐Lived Asset
Author(s) -
Smith R. Todd
Publication year - 1993
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/j.1540-6288.1993.tb01335.x
Subject(s) - operationalization , asset (computer security) , basis risk , diversification (marketing strategy) , economics , financial economics , capital asset pricing model , econometrics , volatility (finance) , consumption based capital asset pricing model , business , computer science , marketing , philosophy , computer security , epistemology
This paper examines the properties of asset prices in an economy in which the true expected return on an asset is unknown and investors have heterogeneous assessments of the expected return. The principal innovation of the analysis is that the formation and evolution of investors' beliefs are modeled in a Bayesian framework. Among other things, this allows one to operationalize the notion of investor confidence. The dispersion of beliefs is, in contrast to the findings of many existing studies, not vacuous for asset prices and, in fact, can have virtually any qualitative effect on asset prices depending on the parameterization. The model has implications for the volatility of asset prices and shows that learning can give rise to some unconventional relationships, such as an inverse relationship between asset prices and risk.