Abstract
In an asset market where agents have heterogeneous information, asset prices not only depend their expectations of the true fundamentals but also depend on their expectations of the expectations of others.Iterations of such expectations lead to the so-called infinite regress'' problem, which makes the analysis of asset pricing under heterogeneous information challenging. In this paper, we solve the infinite-regress problem in a simple economic setting under a fairly general information structure. This allows us to examine how different forms of information heterogeneity impacts the behavior of asset prices, their return dynamics, trading volume as well as agents' welfare. We find that in general current prices exhibit long-range dependence on past shocks. Moreover, we show that information heterogeneity tends to lower the level of asset prices, increase price volatility and return variability, and reduce trading volume. It also tends to decrease agents' welfare, including those with superior information.
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
