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An approach to asset pricing under incomplete and diverse perceptions

Eyster, Erik and Piccione, Michele (2013) An approach to asset pricing under incomplete and diverse perceptions. Econometrica, 81 (4). pp. 1483-1506. ISSN 0012-9682

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Identification Number: 10.3982/ECTA10499

Abstract

We model a dynamic, competitive market, where in every period, risk-neutral traders trade a one-period bond against an infinitely lived asset, with limited short-selling of the long-term asset. Traders lack structural knowledge and use different “incomplete theories,” all of which give statistically correct beliefs about next period's market price of the long-term asset. The more theories there are in the market, the higher is the equilibrium price of the long-term asset. Investors with more complete theories do not necessarily earn higher returns than those with less complete ones, who can earn above the risk-free rate. We provide two necessary conditions for a trader to earn above the risk-free rate.

Item Type: Article
Official URL: http://onlinelibrary.wiley.com/journal/10.1111/%28...
Additional Information: © 2013 The Econometric Society
Divisions: Economics
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
JEL classification: G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates
Sets: Departments > Economics
Collections > Economists Online
Date Deposited: 22 Aug 2013 10:56
Last Modified: 20 Feb 2019 10:36
URI: http://eprints.lse.ac.uk/id/eprint/51831

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