An Examination of Heterogeneous Beliefs with a Short Sale Constraint

We use a calibrated dynamic general equilibrium economy with heterogeneous beliefs to study the effects of a short--selling constraint on stock prices, stock price volatility, and interest rates. We find large stock price and volatility effects from heterogeneous beliefs, without introducing short--selling constraints. When we introduce short--selling constraints into the economy, we find small additional stock price valuation effects, with large and offsetting effects on equilibrium interest rates and Sharpe ratios.