Market Selection and Welfare in a Multi-asset Economy*

Fedyk, Yurii; Heyerdahl-Larsen, Christian; Waldén, Johan

doi:10.1093/rof/rfs009

Cited by 40 publications

(25 citation statements)

References 66 publications

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“…15 See Basak (2005) and the references therein for a discussion of heterogenous beliefs models when the likelihood ratio is driven by Brownian motions and there is e↵ectively only disagreement about means. For details on investors' survival in heterogenous beliefs models see Fedyk, Heyerdahl-Larsen, and Walden (2013) and the references therein. 16 We divide by p 1 to make the inflation disagreement parameter comparable across examples.…”

Section: Theoretical Resultsmentioning

confidence: 99%

Disagreement about inflation and the yield curve

Ehling

Gallmeyer

Heyerdahl-Larsen

et al. 2018

Journal of Financial Economics

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We show that inflation disagreement, not just expected inflation, has an impact on nominal interest rates. In contrast to expected inflation, which mainly a↵ects the wedge between real and nominal yields, inflation disagreement a↵ects nominal yields predominantly through its impact on the real side of the economy. We show theoretically and empirically that inflation disagreement raises real and nominal yields and their volatilities. Inflation disagreement is positively related to consumers' cross-sectional consumption growth volatility and trading in fixed income securities. Calibrating our model to disagreement, inflation, and yields reproduces the economically significant impact of inflation disagreement on yield curves. , and seminar participants at several conferences and institutions for comments and suggestions. A special thanks goes to Johannes Ruf for many useful discussions about our theoretical results. . 5 We show in the Internet Appendix that inflation disagreement also has an economically and statistically positive e↵ect on the break-even inflation rate and the inflation risk premium. 6 Armantier, de Bruin, Topa, van der Klaauw, and Zafar (2015) show that consumers act on the inflation expectations they report in the MSC. 7 We also show in the Internet Appendix that real and nominal yields and their volatilities are higher when inflation disagreement is high after controlling for disagreement about real GDP growth and earnings. 12 Other papers that empirically explore the role of inflation beliefs on the term structure include Ang, provides a survey of this literature. N 132 132 132 132 132 132 adj. R 2 0.40 0.39 0.56 0.55 0.16 0.14 0.31 0.33 N 132 132 438 438 132 132 132 132 DisInf 0.37 0.40 0.54 0.64 0.29 0.28 0.45 0.49 t-stat 3.50 3.63 4.55 5.42 2.27 2.12 2.55 3.00 ExpInf 0.43 0.40 0.26 0.14 0.35 0.36 0.25 0.24 N 132 132 438 438 132 132 132 132The coe cients for disagreement are positive as well as economically and statistically significant for the SPF and MSC at all maturities, as shown in the top panel of Table 2. An increase in disagreement by one standard deviation for the SPF (0.34%) and the MSC (1.95%) raises the two-year nominal yield by 36% and 51% of its standard deviation (3.42% and 3.63%, respectively). The economic significance of inflation disagreement is large and N 132

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Section: Theoretical Resultsmentioning

confidence: 99%

Disagreement about inflation and the yield curve

Ehling

Gallmeyer

Heyerdahl-Larsen

et al. 2018

Journal of Financial Economics

Self Cite

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“…The shortcut taken in this paper is to assume a finite horizon economy under which both investors survives although one of them sooner or later will dominate. In fact, this market selection is amplified when the number of assets is increased as shown by Fedyk et al (2013). 2 The immediate implication is that the economy eventually will approach a single-agent economy but as can be learned from the above papers the price impact can still be substantial.…”

Section: State Price Densities and Consumption Allocationsmentioning

confidence: 99%

Cross-sectional asset pricing with heterogeneous preferences and beliefs

Hansen

2015

Journal of Economic Dynamics and Control

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“…, t t n t π π π ′ = ⋅⋅⋅ π t and 2 1 , 1 1, 1 (22) and (23) into (17), we have (24) Thus the first order condition of the problem (7) leads to the following optimal solution (25)…”

Section: The Demand Functionmentioning

confidence: 99%

“…Blume and Easley [1] associated market selection with the first-principle of welfare economics, and discovered that in complete market under Pareto optimum allocation, the survival and disappearance of investors depend on the accuracy of their forecasts. Similarly, Fedyk, Heyerdahl and Walden [2] studied the multi-asset economy situation and found that, compared with rational investors, unsophisticated investors could suffer severe loss in the long run even their predication deviations seem priori small. Barucci and Casna [3] also found that under the mean reverting environment, investors who have inaccuracy predictions cannot survive.…”

Section: Introductionmentioning

confidence: 99%

Wealth Share Analysis with “Fundamentalist/Chartist” Heterogeneous Agents

Zhang

Xiong

et al. 2014

Abstract and Applied Analysis

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Abstract：We build a multi-assets heterogeneous agents model with fundamentalists and chartists, who make investment decisions by maximizing the constant relative risk aversion utility function.We verify that the model can reproduce the main stylized facts in real markets, such as fat-tailed return distribution, long-term memory in volatility, and so on. Based on the calibrated model, we study the impacts of the key strategies' parameters on investors' wealth shares. We find that, as chartists' exponential moving average periods increase, their wealth shares also show an increasing trend. This means that higher memory length can help to improve their wealth shares. This effect saturates when the exponential moving average periods are sufficiently long. On the other hand, the mean reversion parameter has no obvious impacts on wealth shares of either type of traders. It suggests that, no matter fundamentalists take moderate strategy or aggressive strategy on the mistake of stock prices, it will has no different impact on their wealth shares in the long run.

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Market Selection and Welfare in a Multi-asset Economy*

Cited by 40 publications

References 66 publications

Disagreement about inflation and the yield curve

Disagreement about inflation and the yield curve

Cross-sectional asset pricing with heterogeneous preferences and beliefs

Wealth Share Analysis with “Fundamentalist/Chartist” Heterogeneous Agents

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