Subjective beliefs estimators and their properties

Anisha Ghosh and Taisuke Otsu

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: Information-theoretic methods recover investors’ subjective beliefs by minimizing the statistical discrepancy between beliefs and the DGP, subject to assets’ Euler constraints. We show that the estimated beliefs converges in probability to its pseudo-true value. Comparing estimators in the Cressie-Read family, we show that the exponential tilting and empirical likelihood estimators produce qualitatively similar estimates of the risk aversion levels and beliefs. The quadratic divergence estimator leads to negative subjective probabilities, implausibly large risk aversion levels, and underestimation of left tail risk. Our results suggest large institutional investors, like pension funds, have countercyclical beliefs about the market return, while extrapolative investors have procyclical beliefs. Our results offer an alternative explanation of the momentum effect in stock returns, help reconcile procyclical beliefs reported in individual investor surveys versus countercyclical beliefs implied by rational expectations representative agent models, and establish the information-theoretic approach as a powerful methodology for the recovery of beliefs.

Keywords: rational expectations; subjective beliefs; pricing kernel; conditioning set; Cressie-Read discrepancy minimization (search for similar items in EconPapers)
JEL-codes: C51 G12 G14 (search for similar items in EconPapers)
Date: 2026-03-18
References: Add references at CitEc
Citations:

Published in Review of Finance, 18, March, 2026. ISSN: 1572-3097

Downloads: (external link)
https://researchonline.lse.ac.uk/id/eprint/130027/ Open access version. (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:130027

Access Statistics for this paper

More papers in LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library LSE Library Portugal Street London, WC2A 2HD, U.K.. Contact information at EDIRC.
Bibliographic data for series maintained by LSERO Manager ().