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Belief dispersion in the stock market

Journal

Journal of Finance

Subject

Finance

Publishing details

Journal of Finance 2018 Vol 73:3 p 1225-1279

Authors / Editors

Atmaz A;Basak S

Biographies

Suleyman Basak

Publication Year

2018

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.

Available on ECCH

No


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