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SUMMARY:Diverse Beliefs in a Simple Economy - Angus Brown\, Phd student on
  DPMMS
DTSTART:20081028T170000Z
DTEND:20081028T180000Z
UID:TALK14849@talks.cam.ac.uk
CONTACT:Eva Gottschalk
DESCRIPTION:This paper introduces a new way of modelling the diverse belie
 fs of agents within an economy. We introduce a model in which all agents r
 eceive the same stream of information. However\, their different beliefs a
 bout the system cause them to behave differently\, yet still rationally.\n
 \nIn the model there is a single risky asset and the agents differ in thei
 r beliefs about the behaviour of this asset. These differences in belief a
 re expressed through a change of measure. The agents seek to maximise thei
 r expected utility of consumption under their individual measure. Using th
 is setup\, we derive an expression for the state price density of the agen
 ts. \nThis enables us to (theoretically) calculate the price of any contin
 gent claim. To illustrate the model further\, we then concentrate on the c
 ase of log investors. We derive expressions for the stock price and intere
 st rate process. We also fit the model to the Shiller data set\, and it ap
 pears to behave very reasonably. Furthermore\, we exhibit how our model ca
 n explain such features as rational overconfidence and the equity premium 
 puzzle.\n
LOCATION:Winstanley Lecture Hall\, Trinity College
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