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Diverse Beliefs, Survival and the Market Price of Risk

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  • Timothy Cogley
  • Thomas J. Sargent

Abstract

We study prices and allocations in a complete‐markets, pure‐exchange economy in which there are two types of agents with different priors over infinite sequences of the aggregate endowment. Aggregate consumption growth evolves exogenously according to a two‐state Markov process. The economy has two types of agents, one that learns about transition probabilities and another that knows them. We examine allocations, the market price of risk and the rate at which asset prices converge to values that would be computed under the assumption that all agents know the transition probabilities.

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  • Timothy Cogley & Thomas J. Sargent, 2009. "Diverse Beliefs, Survival and the Market Price of Risk," Economic Journal, Royal Economic Society, vol. 119(536), pages 354-376, March.
    • Handle: RePEc:wly:econjl:v:119:y:2009:i:536:p:354-376
    DOI: 10.1111/j.1468-0297.2008.02237.x
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    References listed on IDEAS

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    1. Lars Peter Hansen & Thomas J Sargent, 2014. "Beliefs, Doubts and Learning: Valuing Macroeconomic Risk," World Scientific Book Chapters, in: UNCERTAINTY WITHIN ECONOMIC MODELS, chapter 10, pages 331-377, World Scientific Publishing Co. Pte. Ltd..
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    4. Cogley, Timothy & Sargent, Thomas J., 2008. "The market price of risk and the equity premium: A legacy of the Great Depression?," Journal of Monetary Economics, Elsevier, vol. 55(3), pages 454-476, April.
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    9. Peter Bossaerts, 2004. "Filtering Returns for Unspecified Biases in Priors when Testing Asset Pricing Theory," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 71(1), pages 63-86.
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    14. Joseph G. Pearlman & Thomas J. Sargent, 2005. "Knowing the Forecasts of Others," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(2), pages 480-497, April.
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    Cited by:

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    3. Hommes, Cars & in ’t Veld, Daan, 2017. "Booms, busts and behavioural heterogeneity in stock prices," Journal of Economic Dynamics and Control, Elsevier, vol. 80(C), pages 101-124.
    4. Philip Kostov & Sophia Davidova, 2023. "Smallholders Are Not the Same: Under the Hood of Kosovo Agriculture," Land, MDPI, vol. 12(1), pages 1-16, January.
    5. Pataracchia, B., 2013. "Ambiguity aversion and heterogeneity in financial markets : An empirical and theoretical perspective," Other publications TiSEM bc849a3c-87a4-4718-b049-f, Tilburg University, School of Economics and Management.
    6. Easley, David & Yang, Liyan, 2015. "Loss aversion, survival and asset prices," Journal of Economic Theory, Elsevier, vol. 160(C), pages 494-516.
    7. Dindo, Pietro, 2019. "Survival in speculative markets," Journal of Economic Theory, Elsevier, vol. 181(C), pages 1-43.
    8. Strzalecki, Tomasz & Werner, Jan, 2011. "Efficient allocations under ambiguity," Journal of Economic Theory, Elsevier, vol. 146(3), pages 1173-1194, May.
    9. Mark Gertler & Nobuhiro Kiyotaki & Andrea Prestipino, 2020. "Credit Booms, Financial Crises, and Macroprudential Policy," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 37, pages 8-33, August.
    10. Alan Guoming Huang & Eric Hughson & J. Chris Leach, 2016. "Generational Asset Pricing, Equity Puzzles, and Cyclicality," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 22, pages 52-71, October.
    11. Beker, Pablo F. & Espino, Emilio, 2011. "The dynamics of efficient asset trading with heterogeneous beliefs," Journal of Economic Theory, Elsevier, vol. 146(1), pages 189-229, January.
    12. Vladimir Dombrovskii & Tatyana Obyedko, 2014. "Dynamic Investment Portfolio Optimization under Constraints in the Financial Market with Regime Switching using Model Predictive Control," Papers 1410.1136, arXiv.org.
    13. Roger Farmer & Jean-Philippe Bouchaud, 2020. "Self-Fulfilling Prophecies, Quasi Non-Ergodicity & Wealth Inequality," NBER Working Papers 28261, National Bureau of Economic Research, Inc.
    14. Kostov, Philip & Davidova, Sophia, 2017. "One size does not fit all: an empirical investigation of the Romanian agriculture production function," 91st Annual Conference, April 24-26, 2017, Royal Dublin Society, Dublin, Ireland 258642, Agricultural Economics Society.

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