Heterogeneous Beliefs, Asset Prices, and Business Cycles

Saki Bigio, Dejanir Silva and Eduardo Zilberman

No 33672, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper develops a complete-market production economy with heterogeneous beliefs about TFP growth. Hiring occurs before TFP is known and is, therefore, risky (operational leverage). The firm's discount factor depends on a wealth-weighted average of investors' beliefs. Waves of optimism influence asset markets and percolate to labor hiring, tying together the equity premium, equity volatility, and labor volatility puzzles. A taxonomy of belief systems shows that only extrapolative beliefs amplify the volatility of asset prices and hours and lead to risk build up. Disciplined by survey data, the model matches asset-pricing and business-cycle moments, highlighting how heterogeneous beliefs can be a direct driver of aggregate fluctuations.

JEL-codes: D84 E32 E44 E71 G41 (search for similar items in EconPapers)
Date: 2025-04
Note: AP EFG ME
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.nber.org/papers/w33672.pdf (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:nbr:nberwo:33672

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w33672

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().