INTERTEMPORAL ASSET PRICING WITH HETEROGENEOUS BELIEFS

We examine the behaviour of the interest rate, asset prices, and asset holdings in an economy with heterogeneous, rationally updated beliefs about the expected rate of production growth. The equilibrium interest rate is a weighted average of the interest rates that would prevail in economies populated by homogeneous agents with the beliefs of the respective agents in the heterogeneous model. The weights are given by the fractions of total wealth held. Financial innovation affects the dynamics of allocations and prices but preserves the aggregate output process and the structure of equilibrium: asset prices also display the wealth-weighted average characterization.