Beauty contests and iterated expectations in asset markets

Franklin Allen, Stephen Morris, Hyun Song Shin

Research output: Contribution to journalArticle

161 Scopus citations

Abstract

In a financial market where traders are risk averse and short lived and prices are noisy, asset prices today depend on the average expectation today of tomorrow's price. Thus (iterating this relationship) the date 1 price equals the date 1 average expectation of the date 2 average expectation of the date 3 price. This will not, in general, equal the date 1 average expectation of the date 3 price. We show how this failure of the law of iterated expectations for average belief can help understand the role of higher-order beliefs in a fully rational asset pricing model.

Original languageEnglish (US)
Pages (from-to)719-752
Number of pages34
JournalReview of Financial Studies
Volume19
Issue number3
DOIs
StatePublished - Sep 1 2006

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics

Fingerprint Dive into the research topics of 'Beauty contests and iterated expectations in asset markets'. Together they form a unique fingerprint.

  • Cite this