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Heterogeneous beliefs with information processing capacity constraints and asset pricing in a monetary economy

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  • Wang, Hailong
  • Hu, Duni

Abstract

This paper proposes a monetary model to explore the influences of heterogeneous beliefs and information processing capacity constraints on the dynamics of asset prices. The capacity constraints not only influence the estimations of the capacity constrained investor, but also generate persistent disagreements among the investors. The model implies that reducing the levels of capacity constraints can alleviate the influences of heterogeneous beliefs and helps to stabilize financial markets. The model also reveals that introducing heterogeneous beliefs about both real and nominal sectors not only leads the stock with low monetary policy exposure to have significantly higher average return than the stock with high monetary policy exposure, but also can explain the mixed results about the relationship between the volatility and the risk premium of the aggregate stock market.

Suggested Citation

  • Wang, Hailong & Hu, Duni, 2024. "Heterogeneous beliefs with information processing capacity constraints and asset pricing in a monetary economy," The North American Journal of Economics and Finance, Elsevier, vol. 72(C).
    • Handle: RePEc:eee:ecofin:v:72:y:2024:i:c:s1062940824000688
    DOI: 10.1016/j.najef.2024.102143
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    More about this item

    Keywords

    Heterogeneous beliefs; Capacity constraints; Asset pricing; Risk premium; Portfolio plan;
    All these keywords.

    JEL classification:

    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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