Essay On The Effects Of Investors' Heterogeneous Beliefs And Behavior Biases On Asset Prices

The classical asset-pricing theory believes that the investors are homogeneous and rational in financial market,and further proposes Efficient Market Hypothesis.However,lots of empirical research indicates that the classical asset-pricing theory can not explain many of financial anomalies,such as momentum effects,equity premium puzzle and over-reaction puzzle.By deeply analyzing the classical asset-pricing theory,it can be found that one source of its flaws stems from the assumption of that investors are homogeneous and rational.Based on the investors' heterogeneous beliefs asset-pricing theory is a major breakthrough,and it not only provides theoretical basis for explaining financial anomalies,but also is in favor of lots of empirical research.At meanwhile,behavior finance theory believes that in financial market the investors are not entirely rational and they usually exhibite different degree of irrational beliefs and behavior bias,which is different from the classical asset-pricing theory.Further,behavior finance theory reveals that the investors' irrational beliefs and behavior bias can also impact the dynamics of asset price and the operational environment of market.Therefore,this paper develops Dynamic Stochastic General Equilibrium(DSGE)to explore the effects of the investors' heterogeneous beliefs,noisy signal qualities,money illusions,benchmark incentives and beliefs in Law of Small Numbers on the dynamics of asset prices and the investors' risk portfolio plans.As the above concerns,we summarize this paper's research results as the following five aspects:Firstly,the heterogeneous beliefs can generate differences between the investors' perceived risk prices,which generate endogenous risk-sharing mechanism.This mechanism incites the investors to take speculative tradings in stock markets,and always increases uncertainties and risk premiums of the stocks.On contrary,it usually puts down the stocks' prices.However,when the degree of heterogeneous beliefs is large enough,the stock market is polarized.In other words,the market is dominated by one investor,which further reduces the speculative tradings generated by the heterogeneous beliefs.In such circumstance,the heterogeneous beliefs will raise the stocks' prices and reduce their volatilities and risk premiums.At the meanwhile,this paper finds that the heterogeneous beliefs incite the investors to take opposite strategies on the stocks and short some other securities for the purpose of hedging therisk of future market inversed changing.Finally,this paper finds that there are spillover effects of the heterogeneous beliefs.Secondly,in incomplete information circumstances,the noisy signal qualities can impact the investors' estimations of unobservable economic state variables,which further affect the stocks' prices,asset pricing moments and investors' risk portfolio plans.More precisely,reducing a particular noisy signal quality not only has negative influences on the corresponding stock price and the investors' demands,but also has positives effects on the volatility and risk premium of the stock.Conversely,such changing of the noisy signal quality has positive effects on the other stock's price,but has negative influences on its pricing moments.Specially,this paper finds that reducing the difference between the noisy signal qualities will incite the investors to takes diversified risk portfolio plans,that will increase co-movement between the stocks.Thirdly,in real-life economic situations,the variable indexes are predominately expressed by in nominal terms rather than real ones,then,the investors usually suffer from money illusion.This paper proves that the money illusions lead the nominal shock is non-neutral,and generate spillover effects on the real side of the economy even there are no heterogeneous beliefs about the expected inflation.The money illusions impact the bond yields and their volatilities mainly through classical income and substitution effects.This paper reveals that the stock price and its demands decrease,but the volatility and risk premium of the stock increase as the degree of money illusion increasing.Fourthly,the benchmark incentives affect the individual-specific investors' state densities through the index effect and the relative index effect,and further impact the risk asset's prices and its pricing moments.As the degree of the benchmark incentives increasing,the investors incline put more weights on the benchmark stock and put up its price.On contrary,such changing has negative influences on the non-benchmark stock prices and its demands.This paper proves that the investors undertake less risk exposes generated by the heterogeneous beliefs and further decreases the benchmark and the non-benchmark stocks' volatilities as the degree of benchmark incentive increasing.Specially,this paper reveals that the investors' benchmark incentives can impact the co-movement between the benchmark and non-benchmark stocks via benchmark hedging mechanism.Fifthly,this paper finds that when the investor has beliefs in Law of Small Numbers,this irrational beliefs generate sentiment process to characterize theinvestor's cognitive bias.Such sentiment process is different from the disagreement process generated by the heterogeneous beliefs.At the meanwhile,this paper finds that the stock price and its risk premium decrease,but the stock's volatility increases as the sentiment process raising.This paper also finds that raising the degree of beliefs in Law of Small Numbers has negative effects on the stock price,but has positive influences on its volatility and the risk premium.Specially,this paper reveals that the differences between the investors' beliefs and behaviors can not explain the counter-cyclical variation in the stock's volatility and risk premium,even the intensity of stock trading.Finally,this paper finds that the rational investor can capture the mispricing benefits of the stock generated by the non-rational investor's cognitive bias via changing his own stock portfolio plans,and further boosts the intensity of stock trading.