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Incomplete Information and Heterogeneous Beliefs in Continuous-time Finance (Springer Finance) [Hardcover]

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Item description for Incomplete Information and Heterogeneous Beliefs in Continuous-time Finance (Springer Finance) by Alexandre Ziegler...

This book considers the impact of incomplete information and heterogeneous beliefs on investor's optimal portfolio and consumption behavior and equilibrium asset prices. After a brief review of the existing incomplete information literature, the effect of incomplete information on investors' exptected utility, risky asset prices, and interest rates is described. It is demonstrated that increasing the quality of investors' information need not increase their expected utility and the prices of risky assets. The impact of heterogeneous beliefs on investors' portfolio and consumption behavior and equilibrium asset prices is shown to be non-trivial. Heterogeneous beliefs can explain a number of observed phenomena, such as the fact that equilibrium state-price densities are not log-normal, the "smile" in option implied volatility, and the patterns of implied risk aversion reported recently in the literature. It is also demonstrated that financial markets in general do not aggregate information efficiently, a fact that can explain the equity premium puzzle.

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Item Specifications...

Pages   198
Est. Packaging Dimensions:   Length: 0.5" Width: 6.25" Height: 9.75"
Weight:   0.96 lbs.
Binding  Hardcover
Release Date   Apr 28, 2003
Publisher   Springer
ISBN  3540003444  
ISBN13  9783540003441  

Availability  0 units.

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1Books > Special Features > Formats
2Books > Special Features > New & Used Textbooks > Business & Finance > Finance
3Books > Subjects > Business & Investing > Business Life > Workplace
4Books > Subjects > Business & Investing > Economics > General
5Books > Subjects > Business & Investing > Finance
6Books > Subjects > Business & Investing > General
7Books > Subjects > Business & Investing > Investing > Options
8Books > Subjects > Professional & Technical > Accounting & Finance > Finance > General

Reviews - What do customers think about Incomplete Information and Heterogeneous Beliefs in Continuous-time Finance (Springer Finance)?

Reinvention of Published Work  Jan 12, 2004
The book has deficiencies that I am sorry to report in the following.
The book is about heterogeneous beliefs. Therefore, a discussion of the
relevant literature would have been appropriate. Unfortunately, the au-
thor does not mention important contributions. I highlight a few omissions.
Mordecai Kurz and his coauthors (1997) have developed a fascinating theory
of heterogeneous, yet rational beliefs. This approach should be part of a
book about the economic implications of heterogeneous beliefs. Stochastic
volatility, to mention just one point that plays also a role in Ziegler's book,
has been shown to arise endogenously in the literature on rational beliefs.
Another approach to heterogeneous beliefs is provided by the recent liter-
ature on 'ambiguity', see Gilboa and Schmeidler (1989), Dow and Werlang
(1992), Epstein and Chen (2002). There, agents are uncertain or ambiguous
about the exact distribution of asset returns. Therefore, they use a whole
class of possible priors and maximize the expected utility under the worst be-
lief. The home bias puzzle, e.g., can be explained by ambiguity, see Epstein
and Miao (2003). Both Kurz's approach as well as the ambiguity literature
have the advantage of having a sound decision theoretic foundation whereas
the assumption of heterogeneous priors is somewhat ad hoc.
Chapter 2 of Ziegler's book has been published before { but not by the
author. In fact, it is the sad reviewer who has published not only that chap-
ter (Riedel (2000a)) but related work earlier(Riedel (2000b), Riedel (2001)).
Parts of Chapter 5 are easy corollaries to Chapter 1 in Riedel (2000b). Un-
fortunately, Ziegler has not read these contributions.

Detemple, J. (1986): Asset Pricing in a Production Economy with Incomplete Information," Journal of Finance, 41, 383-391.
Detemple, J., and R. Kihlstrom (1987): Acquisition d'Information
dans un Modle Intertemporel en Temps Continu," L'Actualite Economique,

63, 118-137.
Dothan, M. U., and D. Feldman (1986): Equilibrium Interest Rates
and Multiperiod Bonds in a Production-Exchange Economy," Journal of
Finance, 41, 369-382.
Dow, J., and S. Werlang (1992): Uncertainty Aversion, Risk Aversion,
and the Optimal Choice of Portfolio," Econometrica, 60(1), 197-204.
Epstein, L., and Z. Chen (2002): Ambiguity, Risk and Asset returns in
Continuous Time," Econometrica, 70, 14031443.
Epstein, L., and J. Miao (2003): A Two-Person dynamic Equilibrium
under Ambiguity," Journal of Economic Dynamics and Control, 27, 1253-
Gilboa, I., and D. Schmeidler (1989): Maxmin Expected Utility with
Non-Unique Prior," Journal of Mathematical Economics, 18, 141{153.
Kurz, M. (ed.) (1997): Endogenous Economic Fluctuations: Studies in the
Theory of Rational Beliefsvol. 6 of Springer Series in Economic Theory,
Heidelberg, New York. Springer.
Riedel, F. (2000a): Decreasing Yield Curves in a Model with an Unknown
Constant Growth Rate," European Finance Review, 4, 51-67.
(2000b): Imperfect Information and Investor Heterogeneity in the
Bond Market. Physica, Heidelberg.
(2001): Existence of Arrow{Radner Equilibrium with Endoge-
nously Complete Markets under Incomplete Information," Journal of Economic Theory, 97, 109-122.


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