A framework for CAPM with heterogeneous beliefs

Chiarella, C; Dieci, R; He, XZ

A framework for CAPM with heterogeneous beliefs

Chiarella, C Dieci, R He, XZ

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Publication Type:: Chapter
Citation:: Nonlinear Dynamics in Economics, Finance and Social Sciences: Essays in Honour of John Barkley Rosser Jr, 2010, pp. 353 - 369
Issue Date:: 2010-12-01

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Field	Value	Language
dc.contributor.author	Chiarella, C	en_US
dc.contributor.author	Dieci, R	en_US
dc.contributor.author	He, XZ https://orcid.org/0000-0003-1446-9996	en_US
dc.date.issued	2010-12-01	en_US
dc.identifier.citation	Nonlinear Dynamics in Economics, Finance and Social Sciences: Essays in Honour of John Barkley Rosser Jr, 2010, pp. 353 - 369	en_US
dc.identifier.isbn	9783642040221	en_US
dc.identifier.uri	http://hdl.handle.net/10453/14335
dc.description.abstract	The Sharpe-Lintner-Mossin (Sharpe 1964; Lintner 1965; Mossin 1966) Capital Asset Pricing Model (CAPM) plays a central role in modern finance theory. It is founded on the paradigm of homogeneous beliefs and a rational representative agent. However, froma theoretical perspective this paradigmhas been criticized on a number of grounds, in particular concerning its extreme assumptions about homogeneous beliefs, information about the economic environment, and the computational ability on the part of the rational representative economic agent. The impact of heterogeneous beliefs among investors on the market equilibrium price has been an important focus in the CAPM literature. A number of models with investorswho have heterogeneous beliefs have been previously studied. 1 A common finding in this strand of research is that heterogeneous beliefs can affect aggregate market returns. However, the question remains as to how exactly does heterogeneity affect themarket risk of risky assets? In much of this earlier work, the heterogeneous beliefs reflect either differences of opinion among the investors2 or differences in information upon which investors are trying to learn by using some Bayesian updating rule.3 Heterogeneity has been investigated in the context of either CAPM-like mean-variancemodels (for instance, Lintner 1969; Miller 1977;Williams 1977; and Mayshar 1982) or Arrow-Debreu contingent claims models (as in Varian 1985;Abel 1989; 2002; and Calvet et al. 2004). © 2010 Springer-Verlag Berlin Heidelberg.	en_US
dc.relation.ispartof	Nonlinear Dynamics in Economics, Finance and Social Sciences: Essays in Honour of John Barkley Rosser Jr	en_US
dc.relation.isbasedon	10.1007/978-3-642-04023-8_19	en_US
dc.title	A framework for CAPM with heterogeneous beliefs	en_US
dc.type	Chapter
utslib.for	150205 Investment and Risk Management	en_US
utslib.for	1502 Banking, Finance and Investment	en_US
utslib.for	140199 Economic Theory not elsewhere classified	en_US
pubs.embargo.period	Not known	en_US
pubs.organisational-group	/University of Technology Sydney
pubs.organisational-group	/University of Technology Sydney/Faculty of Business
pubs.organisational-group	/University of Technology Sydney/Faculty of Business/Finance Discipline
pubs.organisational-group	/University of Technology Sydney/Strength - QFRC - Quantitative Finance Research Centre
utslib.copyright.status	closed_access
pubs.publication-status	Published	en_US

Abstract:

The Sharpe-Lintner-Mossin (Sharpe 1964; Lintner 1965; Mossin 1966) Capital Asset Pricing Model (CAPM) plays a central role in modern finance theory. It is founded on the paradigm of homogeneous beliefs and a rational representative agent. However, froma theoretical perspective this paradigmhas been criticized on a number of grounds, in particular concerning its extreme assumptions about homogeneous beliefs, information about the economic environment, and the computational ability on the part of the rational representative economic agent. The impact of heterogeneous beliefs among investors on the market equilibrium price has been an important focus in the CAPM literature. A number of models with investorswho have heterogeneous beliefs have been previously studied. 1 A common finding in this strand of research is that heterogeneous beliefs can affect aggregate market returns. However, the question remains as to how exactly does heterogeneity affect themarket risk of risky assets? In much of this earlier work, the heterogeneous beliefs reflect either differences of opinion among the investors2 or differences in information upon which investors are trying to learn by using some Bayesian updating rule.3 Heterogeneity has been investigated in the context of either CAPM-like mean-variancemodels (for instance, Lintner 1969; Miller 1977;Williams 1977; and Mayshar 1982) or Arrow-Debreu contingent claims models (as in Varian 1985;Abel 1989; 2002; and Calvet et al. 2004). © 2010 Springer-Verlag Berlin Heidelberg.

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http://hdl.handle.net/10453/14335