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Belief Dispersion in the Stock Market

Author

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  • Basak, Suleyman
  • Atmaz, Adem
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.

Suggested Citation

  • Basak, Suleyman & Atmaz, Adem, 2017. "Belief Dispersion in the Stock Market," CEPR Discussion Papers 12056, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:12056
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    More about this item

    Keywords

    Asset pricing; Belief dispersion; Heterogeneous beliefs; Stock price; Mean return; Volatility; Trading volume; Bayesian learning;
    All these keywords.

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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