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Evolution of heterogeneous beliefs and asset overvaluation

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  • Shapiro, Dmitry

Abstract

I analyze a model in which different agents have different non-rational expectations about the future price and cash flows of a risky asset. The beliefs in the society evolve according to a very general class of evolution functions that are monotone; that is if one type has increased its share in the population then all types with higher profit should also have increased their shares. I show that the price of the risky asset converges to the risk-neutral fundamental price even though all agents in the economy are risk-averse. The risky asset thus becomes overvalued as compared to the equilibrium with rational expectations. The overvaluation is a result of the evolution of beliefs and does not rely on such asymmetric assumptions as short-sale constraints or optimistic bias.

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  • Shapiro, Dmitry, 2009. "Evolution of heterogeneous beliefs and asset overvaluation," Journal of Mathematical Economics, Elsevier, vol. 45(3-4), pages 277-292, March.
    • Handle: RePEc:eee:mateco:v:45:y:2009:i:3-4:p:277-292
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    Cited by:

    1. Guillaume Coqueret & Bertrand Tavin, 2019. "Procedural rationality, asset heterogeneity and market selection," Post-Print hal-02312310, HAL.
    2. Guillaume Coqueret, 2017. "Empirical properties of a heterogeneous agent model in large dimensions," Post-Print hal-02312186, HAL.
    3. Thomas Holtfort, 2019. "From standard to evolutionary finance: a literature survey," Management Review Quarterly, Springer, vol. 69(2), pages 207-232, June.
    4. Coqueret, Guillaume & Tavin, Bertrand, 2019. "Procedural rationality, asset heterogeneity and market selection," Journal of Mathematical Economics, Elsevier, vol. 82(C), pages 125-149.
    5. Guillaume Coqueret, 2017. "Empirical properties of a heterogeneous agent model in large dimensions," Post-Print hal-02000726, HAL.
    6. Coqueret, Guillaume, 2017. "Empirical properties of a heterogeneous agent model in large dimensions," Journal of Economic Dynamics and Control, Elsevier, vol. 77(C), pages 180-201.
    7. Guillaume Coqueret, 2016. "Empirical properties of a heterogeneous agent model in large dimensions," Post-Print hal-02088097, HAL.

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