The excessive volatility of prices in financial markets is one of the most pressing puzzles in social science. It has led many to question economic theory, which attributes beneficial effects to markets in the allocation of risks and the aggregation of information. In exploring its causes, we...

Asset pricing theorists have recently started to study the market impact of differences in beliefs among participants. The analysis is often carried out in the framework of Radner's perfect foresight ('rational expectations') equilibrium. Here, we study when this makes sense. In particular, we...