Asset price dynamics with heterogeneous beliefs
P. M. Beaumont, A. J. Culham, A. N. Kercheval
We examine market dynamics in a Lucas-style, asset-pricing model with heterogeneous traders who know the distribution of dividends but not the private information of other traders. Agents optimize a CRRA utility function while learning about aggregate states in order to better estimate the equilibrium pricing function. Our goal is to determine whether and how prices evolve toward equilibrium. In the case where all agents have logarithmic utility, but possibly different holdings and discount factors, we completely describe the market dynamics and show that the familiar equilibrium pricing formula also applies in this more general setting.