A simple asset pricing model with social interactions and heterogeneous beliefs

Abstract

This paper investigates the dynamics of a simple present value asset pricing model with social interactions and heterogeneous beliefs. Investors revise their beliefs in each period according to two features: the ‘fitness measure’ which is the past realized profit and the exogenous ‘social interactions measure’ which is the interaction among traders’ expectations of the mean choice level in the economy. The endogenous type of social interactions arises naturally when there exist both exogenous social interactions and heterogeneous beliefs among traders. Furthermore, it is shown that the characteristics of the steady state and the dynamic behavior of asset prices are mainly determined by the strength of the endogenous type of social interactions.