Incomplete Information and Heterogeneous Beliefs in Continuous-time Finance
By: by Alexandre Ziegler
Series: Springer Finance; Springer finance
Publisher: Springer Berlin Heidelberg
Published: 2003
Place of publication: Berlin, Heidelberg
Language: eng
Format: [electronic resource] /
Number of pages: 198
ISBN-13: 9783642055676; 9783540247555
Subjects: Economics; Finance
Description: This book considers the impact of incomplete information and heterogeneous beliefs on investor's optimal portfolio and consumption behavior and equilibrium asset prices. After a brief review of the existing incomplete information literature, the effect of incomplete information on investors' exptected utility, risky asset prices, and interest rates is described. It is demonstrated that increasing the quality of investors' information need not increase their expected utility and the prices of risky assets. The impact of heterogeneous beliefs on investors' portfolio and consumption behavior and equilibrium asset prices is shown to be non-trivial. Heterogeneous beliefs can explain a number of observed phenomena, such as the fact that equilibrium state-price densities are not log-normal, the "smile" in option implied volatility, and the patterns of implied risk aversion reported recently in the literature. It is also demonstrated that financial markets in general do not aggregate information efficiently, a fact that can explain the equity premium puzzle.
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Table of contents: title: Incomplete Information: An Overview; title: The Impact of Incomplete Information on Utility, Prices, and Interest Rates; title: Optimal Portfolio Choice Under Heterogeneous Beliefs; title: Optimal Consumption Under Heterogeneous Beliefs; title: Equilibrium Asset Pricing Under Heterogeneous Beliefs; title: Costly Information, Imperfect Learning, and Information Aggregation; title: Summary and Conclusion.