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Beliefs Aggregation and Return Predictability

Author

Listed:
  • Albert S. Kyle

    (Robert H. Smith School of Business, University of Maryland)

  • Anna Obizhaeva

    (New Economic School)

  • Yajun Wang

    (Robert H. Smith School of Business, University of Maryland)

Abstract

We study return predictability using a dynamic model of speculative trading among relatively overconfident competitive traders who agree to disagree about the precision of their private information. The return process depends on both parameter values used by traders and empirically correct parameter values. Although traders apply Bayes Law consistently, equilibrium returns are predictable based on current and past dividends and prices. We derive specific conditions under which excess returns exhibit realistic patterns of short-run momentum and long-run mean-reversion. We clarify the concepts of rational expectations and market efficiency in a setting with differences in beliefs.

Suggested Citation

  • Albert S. Kyle & Anna Obizhaeva & Yajun Wang, 2016. "Beliefs Aggregation and Return Predictability," Working Papers w0231, New Economic School (NES).
    • Handle: RePEc:abo:neswpt:w0231
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    File URL: https://www.nes.ru/files/Preprints-resh/WP231.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    asset pricing; predictability; market microstructure; market efficiency; momentum; mean-reversion; anomalies; agreement to disagree;
    All these keywords.

    JEL classification:

    • B41 - Schools of Economic Thought and Methodology - - Economic Methodology - - - Economic Methodology
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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