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Heterogeneous beliefs, speculation and trading in financial markets. (English) Zbl 1180.91138

Carmona, R. A. (ed.) et al., Paris-Princeton lectures on mathematical finance 2003. Berlin: Springer (ISBN 3-540-22266-9/pbk). Lecture Notes in Mathematics 1847, 217-250 (2004).
Summary: We survey recent developments in finance that analyze how heterogeneous beliefs among investors generate speculation and trading. We describe the joint effects of heterogeneous beliefs and short-sales constraints on asset prices, using both static and dynamic models, discuss the no-trade theorem in the rational expectations framework, and present investor overconfidence as a potential source of heterogeneous beliefs. We review recent results of the authors [“Overconfidence and speculative bubbles”, J. Polit. Econ. 111, 1183–1219 (2003)] modeling the resale option that is embedded in share prices in the presence of short-sale constraints and heterogeneous beliefs, highlighting the implied correlation between stock prices and trading volume. Finally, we discuss the survival of investors with incorrect beliefs.
For the entire collection see [Zbl 1047.91002].

MSC:

91B24 Microeconomic theory (price theory and economic markets)
91G99 Actuarial science and mathematical finance
91-02 Research exposition (monographs, survey articles) pertaining to game theory, economics, and finance
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