TITLE

Beauty Contests and Iterated Expectations in Asset Markets

AUTHOR(S)
Allen, Franklin; Morris, Stephen; Hyun Song Shin
PUB. DATE
September 2006
SOURCE
Review of Financial Studies;Fall2006, Vol. 19 Issue 3, p719
SOURCE TYPE
Academic Journal
DOC. TYPE
Article
ABSTRACT
In a financial market where traders are risk averse and short lived and prices are noisy, asset prices today depend on the average expectation today of tomorrow's price. Thus (iterating this relationship) the date 1 price equals the date 1 average expectation of the date 2 average expectation of the date 3 price. This will not, in general, equal the date 1 average expectation of the date 3 price. We show how this failure of the law of iterated expectations for average belief can help understand the role of higher-order beliefs in a fully rational asset pricing model.
ACCESSION #
22501777

 

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