Heterogeneous Beliefs with Finite-Lived Agents

TL;DR

This paper models a financial market with agents who have heterogeneous beliefs, finite lifetimes, and Bayesian learning, deriving asset prices and interest rates while illustrating their behavior through numerical examples.

Contribution

It introduces a novel model combining heterogeneous beliefs, finite agent lifetimes, and Bayesian learning to analyze asset prices and interest rates.

Findings

Derived explicit expressions for stock prices and riskless rates.

Numerical examples demonstrate the impact of belief heterogeneity and agent turnover.

Showed that agents' uncertainty persists due to finite lifetimes and belief differences.

Abstract

This paper will examine a model with many agents, each of whom has a different belief about the dynamics of a risky asset. The agents are Bayesian and so learn about the asset over time. All agents are assumed to have a finite (but random) lifetime. When an agent dies, he passes his wealth (but not his knowledge) onto his heir. As a result, the agents never become sure of the dynamics of the risky asset. We derive expressions for the stock price and riskless rate. We then use numerical examples to exhibit their behaviour.