Dispersion of Beliefs Bounds: Sentimental Recovery

Altan Pazarbaşı (), Paul Schneider () and Grigory Vilkov ()
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Altan Pazarbaşı: Faculty of Business Administration, Bilkent University, 06800 Ankara, Turkey
Paul Schneider: Universita della Svizzera italiana Lugano and Swiss Finance Institute, 6900 Lugano, Switzerland
Grigory Vilkov: Frankfurt School of Finance & Management, 60322 Frankfurt am Main, Germany

Management Science, 2024, vol. 70, issue 12, 8284-8300

Abstract: We present a nonparametric method to recover a bound on ex ante dispersion of beliefs (DBB) from asset prices with minimal assumptions. DBB constrains the dispersion among all possible distributions in an economy, consistent with observed prices and subject to a good-deal bound. In model-based economies, DBB effectively tracks belief heterogeneity and serves as a diagnostic tool for evaluating model calibrations. Empirically, DBB relates to common proxies of belief dispersion, offering a real-time, market-implied disagreement measure. Our versatile approach applies to both complete and incomplete markets represented by any asset class.

Keywords: recovery; sentiment; market views; agent heterogeneity; volatility trading; market spanning; disagreement; beliefs (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:70:y:2024:i:12:p:8284-8300

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