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Heterogeneous Beliefs in a Continuous-Time Model

Author

Listed:
  • Chiaki Hara

    (Institute of Economic Research, Kyoto University)

Abstract

In an exchange economy under uncertainty populated by consumers having constant and equal relative risk aversion but heterogeneous probabilistic beliefs, we analyze the nature of the representative consumer's probabilistic belief and discount rates. We prove a formula that implies that the representative consumer's discount rates are raised or lowered by belief heterogeneity depending on whether the constant relative risk aversion is greater or smaller than one. We also show that the representative consumer's discount rates may be a hyperbolic function of time even when the individual consumers' discount rates are equal to one another, as long as their beliefs are heterogeneous.

Suggested Citation

  • Chiaki Hara, 2010. "Heterogeneous Beliefs in a Continuous-Time Model," KIER Working Papers 701, Kyoto University, Institute of Economic Research.
    • Handle: RePEc:kyo:wpaper:701
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    File URL: http://www.kier.kyoto-u.ac.jp/DP/DP701.pdf
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    More about this item

    Keywords

    Representative consumer; expected utility; hyperbolic discounting; constant relative risk aversion; Ito's Lemma; Girsanov's Theorem;
    All these keywords.

    JEL classification:

    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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