Heterogeneous Beliefs, Speculation and Trading in Financial Markets
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 Scheinkman and Xiong (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.
Mathematics Subject Classification (2000):92B24 91B28 91B44 91B70 60H30 93E20
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