Abstract.
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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© 2004 Springer-Verlag Berlin/Heidelberg
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Scheinkman, J., Xiong, W. (2004). Heterogeneous Beliefs, Speculation and Trading in Financial Markets. In: Carmona, R.A., Çinlar, E., Ekeland, I., Jouini, E., Scheinkman, J.A., Touzi, N. (eds) Paris-Princeton Lectures on Mathematical Finance 2003. Lecture Notes in Mathematics, vol 1847. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-540-44468-8_3
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DOI: https://doi.org/10.1007/978-3-540-44468-8_3
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