Dispersion of Beliefs Bounds: Sentimental Recovery

Abstract

We present a non-parametric 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

JEL Classification: G11, G12, G13, G17