Insights: On the Kurz Model of Asset Prices with Rational Beliefs

Craig W. French

Volume 10, Number 2, Second Quarter 2012

Mordecai Kurz has proposed an asset pricing model incorporating endogenous uncertainty. Kurz contrasts Rational Belief Equilibrium (RBE) with the more familiar theory of Rational Expectations Equilibrium (REE). In RBE, the aggregate market will generally misprice assets and stock returns can be explained by forecasting mistakes of investors. RBE suggests a strong basis for active management of risky assets, which may in fact be harmonious with passive management, rooted in REE. I conjecture that the Theory of Rational Expectations is isomorphic to the Theory of Rational Beliefs.