Belief Dispersion and Convex Cost of Adjustment in the Stock Market and in the Real Economy

Elyès Jouini ()
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Elyès Jouini: Laboratoire d’Économie Dauphine and Centre de Recherche en Mathématiques de la Décision, Université Paris-Dauphine, Université Paris Sciences et Lettres, Centre National de la Recherche Scientifique, 75016 Paris, France

Management Science, 2023, vol. 69, issue 7, 4190-4209

Abstract: I develop a continuous-time general equilibrium model with a continuum of states of the world and a continuum of agents endowed with heterogeneous beliefs. The model permits to analyze the interactions between financial markets and production. There is a single firm that faces convex adjustment costs and maximizes its terminal value. Equivalently, the firm uses decreasing returns to scale risk-return technology. The model is tractable and matches many of the empirical regularities in aggregate output and stock prices, such as a financial volatility that is higher than the macroeconomic volatility, skewness, kurtosis, short-term momentum, and volatility risk premium during recessions. All these aspects disappear when one assumes beliefs homogeneity or constant returns to scale. In particular, the impact of beliefs heterogeneity observed in endowment economies does not pertain when introducing production unless one assumes decreasing returns to scale in the risk-return technology.

Keywords: asset pricing; belief dispersion; production equilibrium; decreasing returns; adjustment costs; heterogeneous beliefs; excessive volatility; asset pricing puzzles (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:69:y:2023:i:7:p:4190-4209

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