Dispersion of Beliefs Bounds: Sentimental Recovery

Swiss Finance Institute Research Paper No. 19-57

Management Science, forthcoming

63 Pages Posted: 31 Oct 2019 Last revised: 18 Feb 2024

See all articles by Altan Pazarbasi

Altan Pazarbasi

Bilkent University

Paul Schneider

University of Lugano - Institute of Finance; Swiss Finance Institute

Grigory Vilkov

Frankfurt School of Finance & Management

Date Written: October 31, 2019

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

Suggested Citation

Pazarbasi, Altan and Schneider, Paul Georg and Vilkov, Grigory, Dispersion of Beliefs Bounds: Sentimental Recovery (October 31, 2019). Swiss Finance Institute Research Paper No. 19-57, Management Science, forthcoming, Available at SSRN: https://ssrn.com/abstract=3478587 or http://dx.doi.org/10.2139/ssrn.3478587

Altan Pazarbasi

Bilkent University ( email )

06533 Bilkent, Ankara
Turkey

Paul Georg Schneider

University of Lugano - Institute of Finance ( email )

Via Buffi 13
CH-6900 Lugano
Switzerland

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Grigory Vilkov (Contact Author)

Frankfurt School of Finance & Management ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

HOME PAGE: http://www.vilkov.net

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