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Asset pricing with heterogeneous beliefs and relative performance

Huang, Shiyang, Qiu, Zhigang, Shang, Qi and Tang, Ke (2013) Asset pricing with heterogeneous beliefs and relative performance. Journal of Banking and Finance, 37 (11). pp. 4107-4119. ISSN 0378-4266

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Identification Number: 10.1016/j.jbankfin.2013.07.018

Abstract

We propose an equilibrium asset pricing model in which agents with heterogeneous beliefs care about relative performance. We find that the concern with relative performance leads agents to trade more similarly, a development that has two effects. First, similar trading directly decreases volatility. Second, similar trading decreases the impact of dominant agents. The second effect dominates the first when agents expect large differences between their final performances, and vice versa when agents expect small differences between their final performances. Compared with the case in which agents are unconcerned about relative performance, the stock return volatility is higher when the second effect dominates, and lower when the first effect dominates. This paper also demonstrates that the concern about relative performance influences investors’ holdings, stock prices and risk premia.

Item Type: Article
Official URL: http://www.sciencedirect.com/science/journal/03784...
Additional Information: © 2013 Elsevier B.V.
Divisions: Finance
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 > Finance
Collections > Economists Online
Date Deposited: 12 Sep 2013 13:34
Last Modified: 20 Sep 2019 01:44
Projects: Grant No. 71171194
Funders: National Natural Science Foundation of China
URI: http://eprints.lse.ac.uk/id/eprint/52527

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