Incomplete Information and Heterogeneous Beliefs in Continuous-time Finance

1. Front Matter

   Pages I-XIII

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2. Incomplete Information: An Overview

   • Alexandre Ziegler

   Pages 1-21

3. The Impact of Incomplete Information on Utility, Prices, and Interest Rates

   • Alexandre Ziegler

   Pages 23-63

4. Optimal Portfolio Choice Under Heterogeneous Beliefs

   • Alexandre Ziegler

   Pages 65-79

5. Optimal Consumption Under Heterogeneous Beliefs

   • Alexandre Ziegler

   Pages 81-108

6. Equilibrium Asset Pricing Under Heterogeneous Beliefs

   • Alexandre Ziegler

   Pages 109-148

7. Costly Information, Imperfect Learning, and Information Aggregation

   • Alexandre Ziegler

   Pages 149-171

8. Summary and Conclusion

   • Alexandre Ziegler

   Pages 173-177

9. Back Matter

   Pages 179-198

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Continuous-time finance was developed in the late sixties and early seventies by R. C. Merton. Over the years, due to its elegance and analytical conve­ nience, the continuous-time paradigm has become the standard tool of anal­ ysis in portfolio theory and asset pricing. However, and probably because it was developed hand in hand with option pricing, in which investors' expecta­ tions were thought not to matter, continuous-time finance has for a long time almost entirely neglected investors' beliefs. More recently, the development of martingale pricing techniques, in which expectations playa dominant role, and the blurring boundary between those methods and the original methods of continuous-time finance based on the Ito calculus, have allowed expecta­ tions to regain their central role in finance. The habilitation thesis of Professor Alexandre Ziegler is entirely devoted to the role of expectations in continuous-time finance. After a brief review of the literature, the author analyzes the consequences of incomplete informa­ tion and heterogeneous beliefs for optimal portfolio and consumption choice and equilibrium asset pricing. Relaxing the assumption that investors can ob­ serve expected dividend growth perfectly, the author shows that incomplete information affects stock prices and their dynamics, thus providing a potential explanation for the asset price bubble of the late 1990s. He also demonstrates how the presence of heterogeneous beliefs among investors affects their opti­ mal portfolios and their optimal consumption patterns.

• Asset Pricing
• Equity Premium
• Finance
• Heterogeneous Beliefs
• Incomplete Information
• Option Pricing
• quantitative finance

From the reviews of the first edition:

"The book is mainly addressed to researchers and graduate students in the fields of economics or finance. However, interested practitioners may also be counted to its target audience. … the book presents an interesting source for those readers interested in the interplay of (micro-) economics and finance, ie. of incomplete information, heterogeneous beliefs and continuous-time financial models." (Klaus Schürger, Zentralblatt MATH, Vol. 1074, 2005)

• Ecole des HEC, Université de Lausanne, BFSH 1, Lausanne-Dorigny, Switzerland

  Alexandre Ziegler

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