Belief Dispersion in the Stock Market

Abstract

We develop a dynamic model of belief dispersion with a continuum of investors differing in beliefs. The model is tractable and qualitatively matches many of the empirical regularities in a stock price, its mean return, volatility, and trading volume. We find that the stock price is convex in cash-flow news and increases in belief dispersion, while its mean return decreases when the view on the stock is optimistic, and vice versa when pessimistic. Moreover, belief dispersion leads to a higher stock volatility and trading volume. We demonstrate that otherwise identical two-investor heterogeneous-beliefs economies do not necessarily generate our main results.

Appendix is available at: https://ssrn.com/abstract=2968432

Keywords: Asset pricing, belief dispersion, heterogeneous beliefs, stock price, mean return, volatility, trading volume, Bayesian learning

JEL Classification: D53, G12