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‘Nobody is perfect’: Asset pricing and long-run survival when heterogeneous investors exhibit different kinds of filtering errors

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  • Branger, Nicole
  • Schlag, Christian
  • Wu, Lue

Abstract

In this paper we analyze an economy with two heterogeneous investors who both exhibit misspecified filtering models for the unobservable expected growth rate of the aggregated dividend. A key result of our analysis with respect to long-run investor survival is that there are degrees of model misspecification on the part of one investor for which there is no compensation by the other investor's deficiency. The main finding with respect to the asset pricing properties of our model is that the two dimensions of asset pricing and survival are basically independent. In scenarios when the investors are more similar with respect to their expected consumption shares, return volatilities can nevertheless be higher than in cases when they are very different.

Suggested Citation

  • Branger, Nicole & Schlag, Christian & Wu, Lue, 2015. "‘Nobody is perfect’: Asset pricing and long-run survival when heterogeneous investors exhibit different kinds of filtering errors," Journal of Economic Dynamics and Control, Elsevier, vol. 61(C), pages 303-333.
    • Handle: RePEc:eee:dyncon:v:61:y:2015:i:c:p:303-333
    DOI: 10.1016/j.jedc.2015.08.005
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    References listed on IDEAS

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    1. Andrea Buraschi & Fabio Trojani & Andrea Vedolin, 2014. "When Uncertainty Blows in the Orchard: Comovement and Equilibrium Volatility Risk Premia," Journal of Finance, American Finance Association, vol. 69(1), pages 101-137, February.
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    8. Jose A. Scheinkman & Wei Xiong, 2003. "Overconfidence and Speculative Bubbles," Journal of Political Economy, University of Chicago Press, vol. 111(6), pages 1183-1219, December.
    9. Hongjun Yan, 2008. "Natural Selection in Financial Markets: Does It Work?," Management Science, INFORMS, vol. 54(11), pages 1935-1950, November.
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    Cited by:

    1. Norman, Thomas W.L., 2020. "Market selection with an endogenous state," Journal of Mathematical Economics, Elsevier, vol. 91(C), pages 51-59.
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    3. Ma, Chaoqun & Wang, Hailong & Cheng, Fengchao & Hu, Duni, 2018. "How money illusions and heterogeneous beliefs affect asset prices," The North American Journal of Economics and Finance, Elsevier, vol. 44(C), pages 167-192.
    4. Shi, Lei, 2016. "Consumption-based CAPM with belief heterogeneity," Journal of Economic Dynamics and Control, Elsevier, vol. 65(C), pages 30-46.
    5. Massari, Filippo, 2017. "Markets with heterogeneous beliefs: A necessary and sufficient condition for a trader to vanish," Journal of Economic Dynamics and Control, Elsevier, vol. 78(C), pages 190-205.

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    More about this item

    Keywords

    General equilibrium; Asset allocation; Learning; Different beliefs; Over-confidence;
    All these keywords.

    JEL classification:

    • 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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