Discussion paper

DP12056 Belief Dispersion in the Stock Market

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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Citation

Basak, S and A Atmaz (eds) (2017), “DP12056 Belief Dispersion in the Stock Market”, CEPR Press Discussion Paper No. 12056. https://cepr.org/publications/dp12056