A Framework for CAPM with Heterogenous Beliefs
We introduce heterogeneous beliefs in to the mean-variance framework of the standard CAPM, in contrast to the standard approach which assumes homogeneous beliefs. By assuming that agents form optimal portfolios based upon their heterogeneous beliefs about conditional means and covariances of the risky asset returns, we set up a framework for the CAPM that incorporates the heterogeneous beliefs when the market is in equilibrium. In this framework we first construct a consensus belief (with respect to the means and covariances of the risky asset returns) to represent the aggregate market belief when the market is in equilibrium. We then extend the analysis to a repeated one-period set-up and establish a framework for a dynamic CAPM using a market fraction model in which agents are grouped according to their beliefs. The exact relation between heterogeneous beliefs, the market equilibrium returns and the ex-ante beta-coeffcients is obtained. CAPM and Heterogeneous beliefs.
Year of publication: |
2009-08-01
|
---|---|
Authors: | Chiarella, Carl ; Dieci, Roberto ; He, Xue-Zhong |
Institutions: | Finance Discipline Group, Business School |
Saved in:
Saved in favorites
Similar items by person
-
Aggregation of Heterogeneous Beliefs and Asset Pricing Theory: A Mean-Variance Analysis
Chiarella, Carl, (2006)
-
Heterogeneity, Market Mechanisms, and Asset Price Dynamics
Chiarella, Carl, (2008)
-
Heterogeneous Expectations and Speculative Behaviour in a Dynamic Multi-Asset Framework
Chiarella, Carl, (2005)
- More ...