Heterogeneous Beliefs, Wealth Accumulation and Asset Price Dynamics

Abstract

This paper develops and analyzes a models of asset markets with two types of investors. We study the stochastic processes for the distribution of wealth between the two types of investors and for the equilibrium asset returns. The relationship between this model and some econometric models with time varying parameter, such as the ARCH(Autoregressive Conditional Heteroskedasticity) model, as well as the relationship between the volume of trade and volatility, are examined. The dynamic properties of another model, regarding investors who use strategies that are a bit more complex, are also analyzed.