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The dynamics of efficient asset trading with heterogeneous beliefs
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Beker, Pablo and Espino, Emilio (2011) The dynamics of efficient asset trading with heterogeneous beliefs. Journal of Economic Theory, Volume 146 (Number 1). pp. 189-229. doi:10.1016/j.jet.2010.08.007 ISSN 00220531.
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Official URL: http://dx.doi.org/10.1016/j.jet.2010.08.007
Abstract
This paper analyzes the dynamic properties of portfolios that sustain dynamically complete markets equilibrium when agents have heterogeneous priors. We argue that the conventional wisdom that belief heterogeneity generates continuous trade and significant fluctuations in individual portfolios may be correct but it needs some qualifications. We consider an infinite horizon stochastic endowment economy populated by many Bayesian agents with heterogeneous priors over the stochastic process of the states of nature. Our approach hinges on studying the portfolios that decentralize Pareto optimal allocations. Since these allocations are typically history dependent, we propose a methodology to provide a complete recursive characterization when agents believe that the process of states of nature is i.i.d. but disagree about the probability of the states. We show that even though heterogeneous priors within that class can indeed generate genuine changes in the portfolios of any dynamically complete markets equilibrium, these changes vanish with probability one if the true process consists of i.i.d. draws from a common distribution and the support of some agent's prior belief contains the true distribution. Finally, we provide examples in which asset trading does not vanish because either (i) no agent learns the true conditional probability of the states or (ii) some agent does not know the true process generating the data is i.i.d.
| Item Type: | Journal Article | ||||
|---|---|---|---|---|---|
| Subjects: | H Social Sciences > HB Economic Theory | ||||
| Divisions: | Faculty of Social Sciences > Economics | ||||
| Library of Congress Subject Headings (LCSH): | Rational expectations (Economic theory), Portfolio management | ||||
| Journal or Publication Title: | Journal of Economic Theory | ||||
| Publisher: | Academic Press | ||||
| ISSN: | 00220531 | ||||
| Official Date: | January 2011 | ||||
| Dates: |
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| Volume: | Volume 146 | ||||
| Number: | Number 1 | ||||
| Page Range: | pp. 189-229 | ||||
| DOI: | 10.1016/j.jet.2010.08.007 | ||||
| Status: | Peer Reviewed | ||||
| Publication Status: | Published | ||||
| Access rights to Published version: | Restricted or Subscription Access |
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