Incomplete-Information Capital Market Equilibrium with Heterogeneous Expectations and Short Sale Restrictions

This article extends Merton's (1987) asset-pricing model under incomplete information to consider the situation when investors' beliefs are divergent and short selling is restricted. The article finds that the diversity of beliefs increases the mean variance inefficiency of the market port...

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Main Authors: WU, Chunchi, Li, Q., Wei, J.
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Language:English
Published: Institutional Knowledge at Singapore Management University 1996
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Online Access:https://ink.library.smu.edu.sg/lkcsb_research/855
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spelling sg-smu-ink.lkcsb_research-18542010-09-23T06:24:04Z Incomplete-Information Capital Market Equilibrium with Heterogeneous Expectations and Short Sale Restrictions WU, Chunchi Li, Q. Wei, J. This article extends Merton's (1987) asset-pricing model under incomplete information to consider the situation when investors' beliefs are divergent and short selling is restricted. The article finds that the diversity of beliefs increases the mean variance inefficiency of the market portfolio and the shadow cost of information. However, the inefficiency of the market portfolio due to divergent beliefs is mitigated by short-sale restrictions. The article also finds that the effect of firm size is intertwined with the residual return variance risk. Consistent with the findings of Levy (1978) and Carroll and Wei (1988), the residual return variance plays an important role in determining the risk and risk premium of each security. Finally, the shadow cost of information is larger and the equilibrium security return is higher when expectations are more diverse. And the effects of divergent beliefs on both information cost and required rates of returns are negatively related to the relative size of investor base for a particular security. 1996-01-01T08:00:00Z text https://ink.library.smu.edu.sg/lkcsb_research/855 info:doi/10.1007/bf00243974 Research Collection Lee Kong Chian School Of Business eng Institutional Knowledge at Singapore Management University Business
institution Singapore Management University
building SMU Libraries
continent Asia
country Singapore
Singapore
content_provider SMU Libraries
collection InK@SMU
language English
topic Business
spellingShingle Business
WU, Chunchi
Li, Q.
Wei, J.
Incomplete-Information Capital Market Equilibrium with Heterogeneous Expectations and Short Sale Restrictions
description This article extends Merton's (1987) asset-pricing model under incomplete information to consider the situation when investors' beliefs are divergent and short selling is restricted. The article finds that the diversity of beliefs increases the mean variance inefficiency of the market portfolio and the shadow cost of information. However, the inefficiency of the market portfolio due to divergent beliefs is mitigated by short-sale restrictions. The article also finds that the effect of firm size is intertwined with the residual return variance risk. Consistent with the findings of Levy (1978) and Carroll and Wei (1988), the residual return variance plays an important role in determining the risk and risk premium of each security. Finally, the shadow cost of information is larger and the equilibrium security return is higher when expectations are more diverse. And the effects of divergent beliefs on both information cost and required rates of returns are negatively related to the relative size of investor base for a particular security.
format text
author WU, Chunchi
Li, Q.
Wei, J.
author_facet WU, Chunchi
Li, Q.
Wei, J.
author_sort WU, Chunchi
title Incomplete-Information Capital Market Equilibrium with Heterogeneous Expectations and Short Sale Restrictions
title_short Incomplete-Information Capital Market Equilibrium with Heterogeneous Expectations and Short Sale Restrictions
title_full Incomplete-Information Capital Market Equilibrium with Heterogeneous Expectations and Short Sale Restrictions
title_fullStr Incomplete-Information Capital Market Equilibrium with Heterogeneous Expectations and Short Sale Restrictions
title_full_unstemmed Incomplete-Information Capital Market Equilibrium with Heterogeneous Expectations and Short Sale Restrictions
title_sort incomplete-information capital market equilibrium with heterogeneous expectations and short sale restrictions
publisher Institutional Knowledge at Singapore Management University
publishDate 1996
url https://ink.library.smu.edu.sg/lkcsb_research/855
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