BFS 2002

Contributed Talk

An Examination of Heterogeneous Beliefs with a Short Sale Constraint

Michael Gallmeyer, Burton Hollifield

We use a calibrated dynamic general equilibrium economy with heterogeneous beliefs to study the effects of a short-selling constraint on stock prices, stock price volatility, and interest rates. We find large stock price and volatility effects from heterogeneous beliefs, without introducing short-selling constraints. When we introduce short-selling constraints into this economy, we find small additional stock price valuation effects, with large and offsetting effects on equilibrium interest rates and Sharpe ratios.