We present a theoretical and empirical evaluation of the role of market belief in the structure of risk premia. To that end we employ a familiar asset pricing model for which we develop in detail the belief structure. The novelty in this development is the treatment of individual and market...

Ex-ante cost of aggregate fluctuations consist of all individual and social cost expanded by optimizing agents aiming to prevent or reduce fluctuations of consumption. These are measured by the cost of resources used to attain the level of consumption volatility currently observed. This paper...

This paper explores works which contribute to explaining market dynamics and volatility by employing models of rational but diverse beliefs. The first part gives a complete exposition of Noisy Rational Expectations (i.e. REE) Asset Pricing Theory where diversity of beliefs arises from diverse...

This work presents a theoretical and empirical evaluation of the role of market belief in the structure of risk premia. Our main result is that fluctuations in market belief are large contributors to the time variability of risk premia. On average, the risk premium on holding Federal Funds...

We study the impact of diverse beliefs on conduct of monetary policy. Individual belief is modeled by a state variable that defines an individual’s perceived laws of motion. We use a New Keynesian Model that is solved with a quadratic approximation hence individual decisions are quadratic...

We explore a New Keynesian Model with diverse beliefs and study the aggregation problems in the log-linearized economy. We show the solution of these problems depend upon the belief structure. Agents' beliefs are described by individual state variables and satisfy three Rationality Axioms,...