Robust Identification of Investor Beliefs

63 Pages Posted: 20 May 2020

See all articles by Xiaohong Chen

Xiaohong Chen

Yale University - Cowles Foundation

Lars Peter Hansen

University of Chicago - Department of Economics; National Bureau of Economic Research (NBER)

Peter Hansen

MIT Sloan School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: May 20, 2020

Abstract

This paper develops a new method informed by data and models to recover information about investor beliefs. Our approach uses information embedded in forward-looking asset prices in conjunction with asset pricing models. We step back from presuming rational expectations and entertain potential belief distortions bounded by a statistical measure of discrepancy. Additionally, our method allows for the direct use of sparse survey evidence to make these bounds more informative. Within our framework, market-implied beliefs may differ from those implied by rational expectations due to behavioral/psychological biases of investors, ambiguity aversion, or omitted permanent components to valuation. Formally, we represent evidence about investor beliefs using a novel nonlinear expectation function deduced using model-implied moment conditions and bounds on statistical divergence. We illustrate our method with a prototypical example from macro-finance using asset market data to infer belief restrictions for macroeconomic growth rates.

Keywords: Asset pricing, Subjective beliefs, Long-term uncertainty, Ambiguity aversion, Cressie-Read divergence, Generalized empirical likelihood, Large deviation theory

Suggested Citation

Chen, Xiaohong and Hansen, Lars Peter and Hansen, Peter, Robust Identification of Investor Beliefs (May 20, 2020). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2020-69. Available at SSRN: https://ssrn.com/abstract=3606276 or http://dx.doi.org/10.2139/ssrn.3606276

Xiaohong Chen

Yale University - Cowles Foundation ( email )

Box 208281
New Haven, CT 06520-8281
United States

Lars Peter Hansen (Contact Author)

University of Chicago - Department of Economics ( email )

1101 E 58th ST
Chicago, IL 60637
United States
773-702-8170 (Phone)
773-702-8490 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Peter Hansen

MIT Sloan School of Management ( email )

77 Massachusetts Avenue
Cambridge, MA 02139-4307
United States

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