Incomplete Information and Heterogeneous Beliefs in Continuous-time Finance

Ziegler, Alexandre

doi:10.1007/978-3-540-24755-5

Cited by 46 publications

(20 citation statements)

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“…The first, perhaps, to include heterogeneous beliefs within an IIE were Detemple and Murthy (1994) (DM). See also the comprehensive work of Ziegler (2003) and the references therein. We believe that DM's result is important support for Aumann's result that rational investors, who choose optimal actions after conditioning on, or taking into account, both their own and others' information, will not agree to disagree.…”

Section: Heterogeneous Beliefsmentioning

confidence: 98%

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Incomplete information equilibria: Separation theorems and other myths

Feldman

2006

Ann Oper Res

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The incomplete information financial economic equilibrium (IIE) literature has been growing at an increasing rate since its inception in the early 1980s. This paper examines issues and concepts essential to understanding, implementing, and testing IIE and understanding its relation to complete information equilibria (CIE). Concepts include the number of state variables in an IIE vis-à-vis the number of state variables in a corresponding CIE; the irrelevance of separation theorems to IIE and the relevance, instead, of a more general state space (re-)representation theorem; the identification of unobservable productivity processes that lead to complete information; the relative level of variable variances in a CIE and the corresponding IIE; stochastic CIE with corresponding deterministic IIE and deterministic CIE with corresponding stochastic IIE; the relationship between IIE and incomplete markets; the (im)persistence of heterogeneous beliefs; and the relation of IIE to the model uncertainty/ambiguity approaches. Understanding these concepts under IIE facilitates understanding the CIE, a special case of IIE.The incomplete information financial economic equilibrium (IIE) literature has been growing at an increasing rate since its inception in the early 1980s. This paper examines concepts and issues essential to understanding, implementing, and testing IIE. Understanding these concepts under IIE facilitates understanding complete information equilibria (CIE), a special case of IIE.The core classical financial economic models-Markowitz's portfolio theory, SharpeLintner-Mossin's CAPM, Merton's and Cox, Ingersoll, and Ross's, 1 intertemporal modelsusually specify equilibrium interest rates, asset prices, optimal portfolio rules, and optimal

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Section: Heterogeneous Beliefsmentioning

confidence: 98%

“…r studying effects of heterogeneous beliefs - Detemple and Murthy (1994), Zapatero (1998), Basak (2000), and Ziegler (2000Ziegler ( , 2002Ziegler ( , and 2003.…”

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confidence: 99%

Incomplete information equilibria: Separation theorems and other myths

Feldman

2006

Ann Oper Res

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“…The U-shape in the log-SDF gives rise to a volatility smile. Ziegler (2003) shows that investor belief differences can impact equilibrium state-price densities. Buraschi and Jiltsov (2006) develop an option pricing and volume model in which agents have heterogeneous beliefs about expected returns and face model uncertainty.…”

Section: Related Literaturementioning

confidence: 99%

Heterogeneous Beliefs and Risk-Neutral Skewness

Friesen¹,

Zhang²,

Zorn³

2012

J. Financ. Quant. Anal.

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This study tests whether belief differences affect the cross-sectional variation of riskneutral skewness using data on firm-level stock options traded on the Chicago Board Options Exchange from 2003 to 2006. We find that stocks with greater belief differences have more negative skews, even after controlling for systematic risk and other firm-level variables known to affect skewness. Factor analysis identifies latent variables linked to risk and belief differences. The belief factor explains more variation in the risk-neutral skewness than the risk-based factor. Our results suggest that belief differences may be one of the unexplained firm-specific components affecting skewness.

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“…In this case the discount factor is also known as a state-price deflator in the literature (cf. Ziegler 2003). The advantage of this approach is that it explicitly links investment to the ultimate goal of investors: consumption.…”

Section: Theories Underlying the Discount Factormentioning

confidence: 98%