publication . Preprint . 2008

Heterogeneity, Bounded Rationality and Market Dysfunctionality

Xue-Zhong He; Lei Shi;
Open Access
  • Published: 01 Oct 2008
Abstract
As the main building blocks of the modern finance theory, homogeneity and rational expectation have faced difficulty in explaining many market anomalies, stylized factors, and market inefficiency in empirical studies. As a result, heterogeneity and bounded rationality have been used as an alterative paradigm of asset price dynamics and this paradigm has been widely recognized recently in both academic and financial market practitioners. Within the framework of Chiarella, Dieci and He (2006a, 2006b) on mean-variance analysis under heterogeneous beliefs in terms of either the payoffs or returns of the risky assets, this paper examines the effect of the heterogenei...
Subjects
free text keywords: heterogeneity; bounded rationality; heterogeneous CAPM; mean-variance efficiency; Sharpe and Treynor ratios, jel:G12, jel:D84
24 references, page 1 of 2

Abel, A. (1989), Asset prices under heterogeneous beliefs: implications for the equity premium, working paper 09-89, Rodney L. White Center for Financial Research.

Abel, A. (2002), 'An exploration of the effects of pessimism and doubt on asset returns', Journal of Economic Dynamics and Control 26, 1075-1092.

Ang, A., Hodrick, R., Xing, Y. and Zhang, X. (2006), 'The cross-section of volatility and expected returns', Journal of Finance 61(1), 259-299.

Bart, J. and Masse, I. (1981), 'Divergence of opinion and risk', Journal of Financial and Quantitative Analysis 16, 23-34.

Basak, S. (2000), 'A model of dynamic equilibrium asset pricing with heterogeneous beliefs and extraneous beliefs', Journal of Economic Dynamics and Control 24, 63-95.

Chan, L., Karceski, J. and Lakonishok, J. (1999), 'On portfolio optimization: forcasting covariance and choosing the risk model', The Review of Financial Studies 12, 937-974. [OpenAIRE]

Chiarella, C., Dieci, R. and He, X. (2006a), Aggregation of heterogeneous beliefs and asset pricing theory: a mean-variance analysis, Technical Report 186, Quantitative Finance Research Center, University of Techonology, Sydney. [OpenAIRE]

Chiarella, C., Dieci, R. and He, X. (2006b), A dynamic heterogeneous beliefs capm, working paper, University of Technology, Sydney. [OpenAIRE]

Detemple, J. and Murthy, S. (1994), 'Intertemporal asset pricing with heterogeneous beliefs', Journal of Economic Theory 62, 294-320.

Diether, K., Malloy, C. and Scherbina, A. (2002), 'Differences of opinion and cross section of stock returns', Journal of Finance 57, 2113-2141. [OpenAIRE]

Huang, C.-F. and Litzenberger, R. (1988), Foundations for Financial Economics, Elsevier, NorthHolland.

Johnson, T. (2004), 'Forecast dispersion and the cross section of expectated returns', Journal of Finance 59, 1957-1978.

Lintner, J. (1965), 'The valuation of risk assets and the selection of risky investments in stock portfolios and capital budgets', Review of Economics and Statistics 47, 13-37. [OpenAIRE]

Lintner, J. (1969), 'The aggregation of investor's diverse judgements and preferences in purely competitive security markets', Journal of Financial and Quantitative Analysis 4, 347-400.

Miller, E. (1977), 'Risk, uncertainity, and divergence of opinion', Journal of Finance 32, 1151-1168.

24 references, page 1 of 2
Powered by OpenAIRE Open Research Graph
Any information missing or wrong?Report an Issue