Imperfect Information and Investor Heterogeneity in the Bond Market

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Springer Science & Business Media, 2000 - Business & Economics - 113 pages
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Real world investors differ in their tastes and attitudes and they do not have, in general, perfect information about the future prospects of the economy. Most theoretical models, however, assume to the contrary that investors are homogeneous and perfectly informed about the market. In this book, an attempt is made to overcome these shortcomings. In three different case studies, the effect of heterogeneous time preferences, heterogeneous beliefs and imperfect information about the economy's growth on the term structure of interest rates are studied. The initial chapter gives an introduction to the theory of financial markets in continuous time under imperfect information and establishes the existence of an equilibrium with complete markets.
 

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Contents

1 Imperfect Information and Complete Asset Markets in Continuous Time
7
12 A Competitive Financial Market with Imperfect Information
9
13 Martingale Representation Theorem for the Innovation Process
18
14 The Existence of an ArrowDebreu Equilibrium Pareto Efficiency and the Representative Agent
24
15 Completeness of the Market and Existence of a Financial Equilibrium
33
16 Pricing Redundant Securities and the Term Structure of Interest Rates
38
2 Heterogeneous Time Preferences The Preferred Habitat Theory Revisited
45
21 Modeling Preferred Habitat Time Preferences
46
31 The Model
74
32 Estimating the Drift
75
33 Equilibrium with Perfect and Imperfect Information
78
34 The Yield Curve with Normal and Bernoulli Prior Beliefs
82
35 General Prior Beliefs
86
Heterogeneous Expectations
91
41 Setup
93
42 Equilibrium
94

22 A Model with Heterogeneous Time Preferences
50
23 Equilibrium
52
24 Analysis of the Term Structure
61
Logistic Time Preferences
62
25 The Demand for LongTerm Bonds
68
The Term Structure when the Growth Rate is Unknown
73
43 Two Examples
105
432 Stationary Unobservable Drift
107
References
111
List of Figures
115
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