DP12056 Belief Dispersion in the Stock Market

Author(s): Adem Atmaz, Suleyman Basak
Publication Date: May 2017
Keyword(s): Asset Pricing, Bayesian learning, belief dispersion, heterogeneous beliefs, mean return, stock price, trading volume, volatility
JEL(s): D53, G12
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=12056

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.