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|
|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.