Diversification effect of heterogeneous beliefs

Xue-Zhong He, Lei Shi

Research output: Chapter in Book/Report/Conference proceedingChapterpeer-review

Abstract

Through a mean-variance (MV) heterogeneous agent models with many risky assets, this paper examines the impact of behavioral heterogeneity on the market equilibrium and MV efficiency. We show that in market equilibrium, though the optimal portfolios of investors under their subjective beliefs are not MV efficient, they can be very close to the MV efficient frontier under the consensus belief. By imposing a mean-preserved spread distribution on the heterogeneous beliefs and conducting a statistical analysis based on Monte Carlo simulations, we show that diversity in the heterogeneous beliefs among investors can improve the Sharpe and Treynor ratios of the market portfolio and the optimal portfolios of investors, leading to a diversification effect of the heterogeneous beliefs.
Original languageEnglish
Title of host publicationComputational methods in economic dynamics
EditorsHerbert Dawid, Willi Semmler
Place of PublicationHeidelberg ; New York
PublisherSpringer
Pages57-75
Number of pages19
ISBN (Electronic)9783642169434
ISBN (Print)9783642169427
DOIs
Publication statusPublished - 2011
Externally publishedYes

Publication series

NameDynamic modeling and econometrics in economics and finance
Volume13
ISSN (Print)1566-0419

Keywords

  • Optimal Portfolio
  • Risky Asset
  • Market Equilibrium
  • Capital Asset Price Model
  • Market Portfolio

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