Belief Disagreements and Collateral Constraints

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Belief Disagreements and Collateral Constraints

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dc.contributor.author Simsek, Alp
dc.date.accessioned 2012-09-17T20:29:10Z
dc.date.issued 2012-09-17
dc.identifier.citation Simsek, Alp. Forthcoming. Belief disagreements and collateral constraints. Econometrica 80. en_US
dc.identifier.issn 0012-9682 en_US
dc.identifier.uri http://nrs.harvard.edu/urn-3:HUL.InstRepos:9561259
dc.description.abstract Belief disagreements have been suggested as a major contributing factor to the recent financial crisis. This paper theoretically evaluates this hypothesis. I assume that optimists have limited wealth and take on leverage in order to take positions in line with their beliefs. To have a significant effect on asset prices, they need to borrow from traders with pessimistic beliefs using loans collateralized by the asset itself. Since pessimists do not value the collateral as much as optimists do, they are reluctant to lend, which provides an endogenous constraint on optimist's ability to borrow and to influence asset prices. I demonstrate that the tightness of this constraint depends on the nature of belief disagreements. Optimism concerning the probability of downside states has no or little effect on asset prices because these types of optimism are disciplined by this constraint. Instead, optimism concerning the relative probability of upside states could have significant effects on asset prices. This asymmetric disciplining effect is robust to allowing for short selling because pessimists that borrow the asset face a similar endogenous constraint. These results emphasize that what investors disagree about matters for asset prices, to a greater extent than the level of disagreements. When richer contracts are available, insurance contracts (similar to credit default swaps) endogenously emerge to facilitate betting. Richer contracts moderate the effect of belief disagreements on asset prices because the medium of betting shifts from buying (or shorting) the asset to trading alternative contracts. en_US
dc.description.sponsorship Economics en_US
dc.language.iso en_US en_US
dc.publisher Econometric Society en_US
dc.relation.hasversion http://www.economics.harvard.edu/files/faculty/papers/1397_simsekBeliefDisagreementsCollateralConstraints3.pdf en_US
dash.license OAP
dc.subject belief disagreements en_US
dc.subject heterogeneous priors en_US
dc.subject collateral constraints en_US
dc.subject leverage en_US
dc.subject margin en_US
dc.subject asymmetric disciplining en_US
dc.subject short selling en_US
dc.title Belief Disagreements and Collateral Constraints en_US
dc.type Journal Article en_US
dc.description.version Accepted Manuscript en_US
dc.relation.journal Econometrica en_US
dash.depositing.author Simsek, Alp
dc.date.available 2012-09-17T20:29:10Z

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  • FAS Scholarly Articles [6902]
    Peer reviewed scholarly articles from the Faculty of Arts and Sciences of Harvard University

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