Global Public Signals, Heterogeneous Beliefs, and Stock Markets Comovement

36 Pages Posted: 20 Aug 2009 Last revised: 10 Jul 2010

See all articles by Daniel Andrei

Daniel Andrei

McGill University; Desautels Faculty of Management

Julien Cujean

Ecole Polytechnique Fédérale de Lausanne

Date Written: February 15, 2010

Abstract

We build an information-based two-country general equilibrium model. There are two dividend processes with correlated growth rates. Agents observe a global public signal informative about both growth rates. We first let agents rationally process information, and then we allow for reasonable departures from rationality. That is, agents are overconfident with respect to the signal, and thus have heterogeneous beliefs. We report a significant increase in comovement between stock returns. Moreover, we find that a small amount of misinterpretation of the global signal is sufficient to generate sizable comovement, as compared to the benchmark case of rational expectations. As an additional implication of overconfidence, we show that our model is able to produce a substantial home equity bias.

Keywords: co-movement, home bias

Suggested Citation

Andrei, Daniel and Cujean, Julien, Global Public Signals, Heterogeneous Beliefs, and Stock Markets Comovement (February 15, 2010). 22nd Australasian Finance and Banking Conference 2009, Available at SSRN: https://ssrn.com/abstract=1457656 or http://dx.doi.org/10.2139/ssrn.1457656

Daniel Andrei (Contact Author)

McGill University ( email )

1001 Sherbrooke St. W
Montreal, Quebec H3A 1G5
Canada

Desautels Faculty of Management ( email )

1001 Sherbrooke St. W
Montreal, Quebec H3A 1G5
Canada

Julien Cujean

Ecole Polytechnique Fédérale de Lausanne ( email )

c/o University of Geneve
40, Bd du Pont-d'Arve
1211 Geneva, CH-6900
Switzerland

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