 Heterogenous beliefs with sentiments and asset pricingHailong Wang and Duni Hu The North American Journal of Economics and Finance, 2022, vol. 63, issue C Abstract: We present a dynamic equilibrium model with two irrational investors: an extrapolator and a contrarian, whose beliefs regarding the growth rate of dividend stream are biased by their sentiments. The key contribution is to connect two disagreements with the degree of irrationality of investors and to provide novel insights into the predictability of stock return. We show that the higher level of sentiment disagreement is, the more stock price is overvalued. However, the future stock price will decline because the extrapolator’s sentiment will cool down over time. Therefore, the sentiment disagreement negatively predicts future return. At the meanwhile, our model not only shows that the survey expectations about cashflows increase the variations in asset price and dampen the corresponding volatility, but also helps to explain the mixed results about the relationship between the investors’ belief dispersions and stock return predictability. Keywords: Extrapolator; Contrarian; Asset pricing; Risk premium; Predictability (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:63:y:2022:i:c:s1062940822001590 DOI: 10.1016/j.najef.2022.101824 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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