Article1980

Heterogeneous Expectations, Restrictions on Short Sales, and Equilibrium Asset Prices

324 citations0/0 files storedThe Journal of Finance

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Financial Markets and Investment Strategies Stochastic processes and financial applications Economic theories and models

Abstract

ABSTRACT Under heterogeneous expectations, the mean–variance model of capital market equilibrium is employed to determine the effect restricting short sales has on equilibrium asset prices. Two equivalent markets differing only with respect to short sale restrictions are compared. It is shown that, in general, risky asset prices can either rise or fall due to short sale constraints. However, under a homogeneity of beliefs for the covariance matrix of future prices, short sale constraints will only increase risky asset prices.

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References

1964CAPITAL ASSET PRICES: A THEORY OF MARKET EQUILIBRIUM UNDER CONDITIONS OF RISK*1973Theory of Rational Option Pricing 2005Theory of rational option pricing 1964Risk Aversion in the Small and in the Large 1976Risk Aversion in the Small and in the Large 1977RISK, UNCERTAINTY, AND DIVERGENCE OF OPINION 1969The Aggregation of Investor's Diverse Judgments and Preferences in Purely Competitive Security Markets

Cited by

1985Divergence of Opinion in Complete Markets: A Note 1993Short-Sale Restrictions and Market Reaction to Short-Interest Announcements 1989Differences of Opinion in Financial Markets 2016Speculative Betas 2004Riding the South Sea Bubble 2016Taste, information, and asset prices: implications for the valuation of CSR 2013Asset Prices with Heterogeneity in Preferences and Beliefs 2007Consensus Consumer and Intertemporal Asset Pricing with Heterogeneous Beliefs

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