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Consensus Consumer and Intertemporal Asset Pricing with Heterogeneous Beliefs

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  • Elyès Jouini
  • Clotilde Napp

Abstract

The aim of this paper is to analyse 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, is 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 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 beliefs 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 analyse the impact of beliefs heterogeneity. Finally, we show that it is possible to construct specific parametrizations of the heterogeneous beliefs model that lead to globally higher risk premia and lower risk-free rates. Copyright 2007, Wiley-Blackwell.

Suggested Citation

  • Elyès Jouini & Clotilde Napp, 2007. "Consensus Consumer and Intertemporal Asset Pricing with Heterogeneous Beliefs," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 74(4), pages 1149-1174.
    • Handle: RePEc:oup:restud:v:74:y:2007:i:4:p:1149-1174
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    File URL: http://hdl.handle.net/10.1111/j.1467-937X.2007.00439.x
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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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