49 Pages Posted: 31 Oct 2019 Last revised: 24 Nov 2020
Date Written: October 31, 2019
We investigate the market-compatible degree of agent heterogeneity by identifying and analyzing the full range of conditional beliefs consistent with observed asset prices and good-deal bounds. Our methodology neither makes assumptions on underlying processes nor does it use survey data. It can be used in any arbitrage-free market. We apply it to S&P500 and VIX derivatives, both jointly and separately. Recovered dispersion of beliefs crucially depends on the degree of market incompleteness and maximally allowed Sharpe ratios; it is related to trading activity and measures of risk in financial markets, as well as professional macroeconomic survey dispersion.
Keywords: Recovery, sentiment, market views, agent heterogeneity, volatility trading, market spanning, disagreement, beliefs
JEL Classification: G11, G12, G13, G17
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