Dispersion of Beliefs, Asset Prices, and Noise Aggregation of Information.

This paper discusses the determinants of the dispersion of beliefs of informed investors and the effects of this dispersion on the equilibrium level of asset prices in a noisy rational expectations model. It is shown that lower asset prices are usually associated with an increase in the dispersion of beliefs. However, when the noise level of private signals is high, or when asset prices are abnormally high, increased dispersion of beliefs will be associated with higher asset prices. This paper shows that the dispersion of beliefs is an increasing function of the standard deviations of an asset's payoff and the noise in the asset's supply, while it may be a decreasing or an increasing function of the standard deviation of errors in private signals. Copyright 1991 by MIT Press.