Sentiment and Speculation in a Market with Heterogeneous Beliefs

Ian Martin and ,
Authors registered in the RePEc Author Service: Dimitris Papadimitriou

No 13857, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We present a dynamic model featuring risk-averse investors with heterogeneous beliefs. Individual investors have stable beliefs and risk aversion, but agents who were correct in hindsight become relatively wealthy; their beliefs are overrepresented in market sentiment, so “the market†is bullish following good news and bearish following bad news. Extreme states are far more important than in a homogeneous economy. Investors understand that sentiment drives volatility up, and demand high risk premia in compensation. Moderate investors supply liquidity: they trade against market sentiment in the hope of capturing a variance risk premium created by the presence of extremists.

Keywords: Heterogeneous beliefs; Excess volatility; Sentiment; Speculation; Target prices (search for similar items in EconPapers)
JEL-codes: E44 G02 G11 G12 G13 (search for similar items in EconPapers)
Date: 2019-07
New Economics Papers: this item is included in nep-mac, nep-mst and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Related works:
Journal Article: Sentiment and Speculation in a Market with Heterogeneous Beliefs (2022)
Working Paper: Sentiment and speculation in a market with heterogeneous beliefs (2022)
Working Paper: Sentiment and speculation in a market with heterogeneous beliefs (2019)
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