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Title

Internal rationality, imperfect market knowledge and asset prices

AuthorsMarcet, Albert CSIC ORCID ; Adam, Klaus
Issue Date2011
PublisherElsevier
CitationJournal of Economic Theory 146(3): 1224-1252 (2011)
AbstractWe present a decision theoretic framework in which agents are learning about market behavior and that provides microfoundations for models of adaptive learning. Agents are ‘internally rational’, i.e., maximize discounted expected utility under uncertainty given dynamically consistent subjective beliefs about the future, but agents may not be ‘externally rational’, i.e., may not know the true stochastic process for payoff relevant variables beyond their control. This includes future market outcomes and fundamentals. We apply this approach to a simple asset pricing model and show that the equilibrium stock price is then determined by investorsʼ expectations of the price and dividend in the next period, rather than by expectations of the discounted sum of dividends. As a result, learning about price behavior affects market outcomes, while learning about the discounted sum of dividends is irrelevant for equilibrium prices. Stock prices equal the discounted sum of dividends only after making very strong assumptions about agentsʼ market knowledge.
Publisher version (URL)http://dx.doi.org/10.1016/j.jet.2010.11.003
URIhttp://hdl.handle.net/10261/57877
DOI10.1016/j.jet.2010.11.003
Identifiersdoi: 10.1016/j.jet.2010.11.003
issn: 0022-0531
Appears in Collections:(IAE) Artículos




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