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Unbiased Disagreement in financial markets, waves of pessimism and the risk return tradeoff

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Date
2011
Link to item file
http://halshs.archives-ouvertes.fr/halshs-00488481/fr/
Dewey
Economie financière
Sujet
rational on average; irrational investors
JEL code
D53; G12
Journal issue
Review of Finance
Volume
15
Number
3
Publication date
2011
Article pages
575-601
Publisher
Oxford University Press
DOI
http://dx.doi.org/10.1093/rof/rfq002
URI
https://basepub.dauphine.fr/handle/123456789/4413
Collections
  • DRM : Publications
Metadata
Show full item record
Author
Napp, Clotilde
Jouini, Elyès
Type
Article accepté pour publication ou publié
Abstract (EN)
Can investors with irrational beliefs be neglected as long as they are rational on average ? Do their trades cancel out with no consequences on prices, as implicitly assumed by traditional models? We consider a model with irrational investors, who are rational on average. We obtain waves of pessimism and optimism that lead to countercyclical market prices of risk and procyclical risk-free rates. The variance of the state price density is greatly increased. The long run risk-return relation is modified; in particular, the long run market price of risk might be higher than both the instantaneous and the rational ones.

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