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Discussion Paper Details

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Title: Belief Dispersion in the Stock Market

Author(s): Adem Atmaz and Suleyman Basak

Publication Date: May 2017

Keyword(s): Asset Pricing, Bayesian learning, belief dispersion, heterogeneous beliefs, mean return, stock price, trading volume and volatility

Programme Area(s): Financial Economics

Abstract: We develop a dynamic model of belief dispersion with a continuum of investors differing in beliefs. The model is tractable and qualitatively matches many of the empirical regularities in a stock price, its mean return, volatility, and trading volume. We find that the stock price is convex in cash-flow news and increases in belief dispersion, while its mean return decreases when the view on the stock is optimistic, and vice versa when pessimistic. Moreover, belief dispersion leads to a higher stock volatility and trading volume. We demonstrate that otherwise identical two-investor heterogeneous-beliefs economies do not necessarily generate our main results.

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Bibliographic Reference

Atmaz, A and Basak, S. 2017. 'Belief Dispersion in the Stock Market'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=12056