 Disagreement with procyclical beliefs and asset pricingHailong Wang and Duni Hu The North American Journal of Economics and Finance, 2020, vol. 51, issue C Abstract: We consider a pure exchange economy with incomplete information in which the expected growth rate of endowment is unobservable. The economy is populated by two investors, one is rational, but the other irrationally believes that the dynamics of endowment exhibit procyclical feature. Such different opinions about the dynamics of endowment process produce persistent disagreement between the investors. We show that model-implied riskfree rate is procyclical. Further, the procyclical beliefs not only explain the excess volatility puzzle, but also help to explain the mixed results about the relationship between the investors’ belief dispersions and stock return. Moreover, we uncover that the rational investor prefers to short stock positions in good times as the degree of the other investor’s irrationality increasing. Keywords: Procyclical beliefs; Disagreement; Kalman filter; Asset pricing; Malliavin derivative (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:51:y:2020:i:c:s1062940819302621 DOI: 10.1016/j.najef.2019.101102 Access Statistics for this article The North American Journal of Economics and Finance is currently edited by Hamid Beladi More articles in The North American Journal of Economics and Finance from Elsevier |
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