Asset pricing with mean reversion: The case of ships

Abstract

We develop a heterogeneous-beliefs asset pricing model with microeconomic foundations that reproduces asset prices, cash flows and trading activity in a real asset economy. In contrast to the majority of financial markets’ behavioural models, and in line with the nature of the shipping industry, in this model agents extrapolate fundamentals. Formal estimation of the model indicates that an economy where a small fraction of agents significantly extrapolates fundamentals can explain the positive relation between earnings, vessel prices, and trading activity.