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Digital issue
issue 3 - 2007
publisher Vita e Pensiero
format Digital issue | Pdf

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pages: 1 Download
Rational Beliefs Theory: A Review
by Maurizio Motolese, Carsten Krabbe Nielsen pages: 34 € 6.00
The Rational Beliefs Theory is founded on the observation that in most situations the same data may be rationally explained (in terms of a statistical model) in many different ways. This is obvious in a world where there is a limited number of observations. The novel idea of the Rational Beliefs Theory is to use a technical device (namely the concept of a non-stationary but stable measure) to formulate rational differences of opinion also in a world with «unlimited» data on the past performance of the economy. In this article we provide a non-technical introduction to the Theory of Rational Beliefs as well as a brief overview of the papers that have been written using this theory.
The Role of Endogenous Uncertainty in the Forward Discount Bias
by Stanley Wilkes Black pages: 38 € 6.00
This study examines what role the concept of endogenous uncertainty can have in explaining a phenomenon of international financial markets, the forward discount bias. The forward discount bias puzzle is unexplained by models assuming economic agents have full knowledge of the structure of the economy. This puzzle is explained here by constructing an overlapping generations model of a Rational Belief Equilibrium in a non-stationary environment where agents do not know the true probability distribution underlying asset price movements. The agents’ beliefs are rational in the sense that their predictions of long term averages of economic variables match historical data. The equilibrium of the model is solved numerically using the nonlinear equation solver TENSOLVE, which is well-suited to models containing multiple financial assets. The results confirm the underlying hypothesis that propagation of the beliefs of economic agents can play an important role in understanding international financial markets
The Ability to «Outperform the Market»: Logical Foundations based on the Theory of Rational Beliefs
by Horace W. Brock pages: 38 € 6.00
Is it theoretically legitimate for an investor to attempt to outperform the market index? Or is the investor simply deluding himself? The purpose of this paper is to apply the new Theory of Rational Beliefs (RB) to demonstrate the following result: Even when all agents have symmetric information, there exist three canonical strategies in an RB environment that make it theoretically legitimate to try to outperform the market. More specifically, while the three strategies that we will identify are not directly implied by RB theory which is a positive theory, the strategies are logically compatible with RB theory when interpreted in a normative manner from the standpoint of an individual agent attempting to exploit the existence of structural change in the environment. This is what we mean by the claim that the proposed strategies are «theoretically legitimate». Moreover, we propose that these three strategies are canonical in the sense that all theoretically legitimate strategies for outperforming the market (including all successful hedge fund strategies that we know of) are combinations of these three basic strategies.
Nominal Interest Rate Rules under Heterogeneous Beliefs
by Hehui Jin pages: 40 € 6.00
This paper presents simple models with competitive markets, fully flexible prices and fully observable macro-economic variables. Agents hold heterogeneous beliefs because the exogenous shocks are stable but non-stationary and the true law of motion is unknown to agents. We show that the diversity of beliefs enables monetary policy to have real effects and the fluctuations in beliefs cause excess volatilities in real economy. By log-linearization we derive a version of the aggregate supply curve which relates aggregate employment to the discrepancies between the market forecast of inflation rate and the stationary forecast of it. The computational results demonstrate that monetary policy rules can dramatically reduce consumption volatility and there is a tradeoff between stability of consumption and inflation. The results are thus comparable with Kurz - Jin - Motolese (2003).
Communication, correlation of beliefs and asset price fluctuations
by Hiroyuki Nakata pages: 28 € 6.00
This paper studies how communication amongst agents influences the equilibrium of a financial economy. We set up a standard overlapping generations (OLG) model with assets, while allowing for heterogeneous beliefs. The paper explicitly describes how communication generates correlation of beliefs, and show that communication can be embedded in the models of rational beliefs that do not model communication explicitly a priori. We confine our attention to a Markovian economy, in which the beliefs of the agents are all Markovian. Simulation results are provided to examine the effects of communication, while classifying the beliefs in accord to the reactions to communication.
Rational Beliefs and Bayesian Learning: A Note
by Carsten Krabbe Nielsen pages: 4 € 6.00
By means of an example, it is demonstrated how rational beliefs may be incorporated into a Bayesian learning model. The empirical distribution is learned over time and the subjective rational belief is modified accordingly.