Heterogeneous Beliefs Asset Market Equilibrium And The Arbitrage Pricing Model
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Aggregation of Heterogeneous Beliefs and Asset Pricing Theory
Author | : Carl Chiarella |
Publisher | : |
Total Pages | : 23 |
Release | : 2008 |
Genre | : |
ISBN | : |
Within the standard mean-variance framework, this paper provides a procedure to aggregate the heterogeneous beliefs in not only risk preferences and expected payoffs but also variances/covariances into a market consensus belief. Consequently, an asset equilibrium price under heterogeneous beliefs is derived. We show that the market aggregate behavior is in principle a weighted average of heterogeneous individual behaviors. The CAPM-like equilibrium price and return relationships under heterogeneous beliefs are obtained. The impact of diversity of heterogeneous beliefs on the market aggregate risk preference, asset volatility, equilibrium price and optimal demands of investors is examined. As a special case, our result provides a simple explanation for the empirical relation between cross-sectional volatility and expected returns.
A Binomial Model of Asset and Option Pricing with Heterogeneous Beliefs
Author | : Xuezhong He |
Publisher | : |
Total Pages | : 27 |
Release | : 2016 |
Genre | : |
ISBN | : |
This paper provides a difference-in-opinions equilibrium framework for pricing asset and option in a multi-period binomial economy with heterogeneous beliefs. Agents agree to disagree about their beliefs on the probability and asset return in each state of nature. By constructing a consensus belief, we examine the impact of heterogeneous beliefs on market equilibrium. We show that agents' wealth shares are expected to remain the same under the consensus belief, although they are expected to increase under their own beliefs. Also large disagreement leads to lower risk premium, while high disagreement on the future return in up state (down state) leads to lower (higher) risk-free rate and expected return for the risky asset. Furthermore, under the consensus belief, the implied volatility of the call options exhibits some observed patterns widely documentedin option markets.
Heterogeneous Beliefs, Risk and Learning in a Simple Asset Pricing Model with a Market Maker
Author | : Carl Chiarella |
Publisher | : |
Total Pages | : 42 |
Release | : 2000 |
Genre | : Capital assets pricing model |
ISBN | : |
A Behavioral Approach to Asset Pricing
Author | : Hersh Shefrin |
Publisher | : Elsevier |
Total Pages | : 636 |
Release | : 2008-05-19 |
Genre | : Business & Economics |
ISBN | : 0080482244 |
Behavioral finance is the study of how psychology affects financial decision making and financial markets. It is increasingly becoming the common way of understanding investor behavior and stock market activity. Incorporating the latest research and theory, Shefrin offers both a strong theory and efficient empirical tools that address derivatives, fixed income securities, mean-variance efficient portfolios, and the market portfolio. The book provides a series of examples to illustrate the theory. The second edition continues the tradition of the first edition by being the one and only book to focus completely on how behavioral finance principles affect asset pricing, now with its theory deepened and enriched by a plethora of research since the first edition
The Arbitrage Pricing Theory as an Approach to Capital Asset Valuation
Author | : Christian Koch |
Publisher | : GRIN Verlag |
Total Pages | : 81 |
Release | : 2009-03 |
Genre | : Business & Economics |
ISBN | : 3640277856 |
Diploma Thesis from the year 1996 in the subject Business economics - Banking, Stock Exchanges, Insurance, Accounting, grade: 1,3, European Business School - International University Schlo Reichartshausen Oestrich-Winkel, 160 entries in the bibliography, language: English, abstract: A "few surprises" could be the trivial answer of the Arbitrage Pricing Theory if asked for the major determinants of stock returns. The APT was developed as a traceable framework of the main principles of capital asset pricing in financial markets. It investigates the causes underlying one of the most important fields in financial economics, namely the relationship between risk and return. The APT provides a thorough understanding of the nature and origins of risk inherent in financial assets and how capital markets reward an investor for bearing risk. Its fundamental intuition is the absence of arbitrage which is, indeed, central to finance and which has been used in virtually all areas of financial study. Since its introduction two decades ago, the APT has been subject to extensive theoretical as well as empirical research. By now, the arbitrage theory is well established in both respects and has enlightened our perception of capital markets. This paper aims to present the APT as an appropriate instrument of capital asset pricing and to link its principles to the valuation of risky income streams. The objective is also to provide an overview of the state of art of APT in the context of alternative capital market theories. For this purpose, Section 2 describes the basic concepts of the traditional asset pricing model, the CAPM, and indicates differences to arbitrage theory. Section 3 constitutes the main part of this paper introducing a derivation of the APT. Emphasis is laid on principles rather than on rigorous proof. The intuition of the pricing formula and its consistency with the state space preference theory are discussed. Important contributions to the APT are classified and br
Heterogeneous Beliefs and Asset Pricing in Discrete Time
Author | : Clotilde Napp |
Publisher | : |
Total Pages | : 36 |
Release | : 2015 |
Genre | : |
ISBN | : |
The aim of the paper is to analyze the impact of heterogeneous beliefs in an otherwise standard competitive complete markets discrete time economy. The construction of a consensus belief, as well as a consensus consumer are shown to be valid modulo a predictable aggregation bias, which takes the form of a discount factor. We use our construction of a consensus consumer to investigate the impact of beliefs heterogeneity on the CCAPM and on the expression of the risk free rate. We focus on the pessimism/doubt of the consensus consumer and we study their impact on the equilibrium characteristics (market price of risk, risk free rate). We finally analyze how pessimism and doubt at the aggregate level result from pessimism and doubt at the individual level.
Speculative Behavior and the Operation of Competitive Markets Under Uncertainty
Author | : Michael Anthony Stephen Guth |
Publisher | : |
Total Pages | : 264 |
Release | : 1994 |
Genre | : Business & Economics |
ISBN | : |
This text deals with different models of speculation in economics. It covers the intrinsic uncertainty in financial economics, and shows how speculation can be used in pricing and in the financial markets.
Consensus Consumer and Intertemporal Asset Pricing with Heterogeneous Beliefs
Author | : Elyes Jouini |
Publisher | : |
Total Pages | : 42 |
Release | : 2015 |
Genre | : |
ISBN | : |
The aim of the paper is to analyze the impact of heterogeneous beliefs in an otherwise standard competitive complete market economy. The construction of a consensus probability belief, as well as a consensus consumer, are shown to be valid modulo an aggregation bias, which takes the form of a discount factor. In classical cases, the consensus probability belief is a risk-tolerance weighted average of the individual beliefs, and the discount factor is proportional to the beliefs dispersion. This discount factor makes the heterogeneous beliefs setting fundamentally different from the homogeneous beliefs setting, and it is consistent with the interpretation of belief heterogeneity as a source of risk.We then use our construction to rewrite in a simple way the equilibrium characteristics (market price of risk, risk premium, risk-free rate) in a heterogeneous beliefs framework and to analyze the impact of belief heterogeneity. Finally, we show that it is possible to construct specific parametrizations of the heterogeneous beliefs model that lead to globally higher risk premia, lower risk-free rates, and risk premia that are lower for assets with higher belief dispersion.