publication . Preprint . 2008

Heterogeneity, Bounded Rationality and Market Dysfunctionality

Xue-Zhong He; Lei Shi;
Open Access
  • Published: 01 Oct 2008
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...
free text keywords: heterogeneity; bounded rationality; heterogeneous CAPM; mean-variance efficiency; Sharpe and Treynor ratios, jel:G12, jel:D84
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