Working Paper: CEPR ID: DP12056
Authors: Adem Atmaz; Suleyman Basak
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.
Keywords: Asset Pricing; Belief Dispersion; Heterogeneous Beliefs; Stock Price; Mean Return; Volatility; Trading Volume; Bayesian Learning
JEL Codes: D53; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| belief dispersion (D80) | stock price (G12) |
| belief dispersion (D80) | stock volatility (G17) |
| belief dispersion (D80) | trading volume (G15) |
| belief dispersion (D80) | mean return (C29) |
| risk aversion (D81) | stock price (G12) |
| risk aversion (D81) | mean return (C29) |