Demand Disagreement

Abstract

We show that disagreement about future yields cannot be explained by disagreement about fundamental macroeconomic variables. This disconnect is inconsistent with models with differences in beliefs as equilibrium imposes a tight connection between asset return disagreement and fundamental disagreement, leading to a ``disagreement correlation’’ puzzle. We propose a model of disagreement about future asset demand – demand disagreement - and show that the model can rationalize the low correlation between asset returns and fundamentals and return disagreement driven by disagreement about future discount rates independent of macroeconomic fundamentals, while at the same time being consistent with several asset pricing facts.

Keywords: Disagreement correlation puzzle, correlation puzzle, demand shocks, demand disagreement, heterogeneous beliefs and time preferences, asset pricing puzzles, trading volume.

JEL Classification: D51, G10, G11, G12