This paper determines equilibrium asset prices and returns in a capital market in which investors have heterogeneous subjective expectations of the payoff to capital.
Increased heterogeneity increases the riskless rate of return and reduces the stock price.
Heterogeneity can also dramatically increase the equilibrium equity premium on stocks relative to bonds. Therefore, calculating the equity premium under the assumption of homogeneous beliefs could dramatically understate the equity premium that would prevail under heterogeneity. Please take the time and register at our new service.