DP16441 Dynamics of Asset Demands with Confidence Heterogeneity

Author(s): Adrian Buss, Raman Uppal, Grigory Vilkov
Publication Date: August 2021
Keyword(s): asset-demand elasticity, Institutional asset demand, investors' expectations, predictability, trend chasing
JEL(s): D53, G11, G12
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16441

To understand the dynamics of investor asset demands, we develop a multiperiod general-equilibrium model driven by a single latent variable, differences in beliefs, resulting from heterogeneity in investors' confidence regarding the return dynamics of assets. Consistent with the data, investors' asset holdings are concentrated and display large and persistent heterogeneity in asset demands across investors. Moreover, demand curves are steeper than with homogeneous beliefs. The time-series and cross-sectional variation in assets' realized and expected returns, as well as their volatilities, are driven by the mean and dispersion of latent demand.