Recovering Heterogeneous Beliefs and Preferences from Asset Prices

47 Pages Posted: 20 Jul 2020 Last revised: 14 Dec 2022

See all articles by Anisha Ghosh

Anisha Ghosh

McGill University

Arthur G. Korteweg

University of Southern California - Marshall School of Business

Qing Xu

McGill University, Desautels Faculty of Management, Students

Date Written: December 13, 2022

Abstract

We propose a novel information-theoretic approach to identify the risk preferences and beliefs of different investor types. Investors who optimally allocate most of their wealth to large market capitalization stocks are risk averse and believe that the stock market return, and its Sharpe ratio, are countercyclical. Investors in value stocks have similar risk preferences and beliefs. In contrast, investors in momentum and small-growth stocks have procyclical beliefs. Momentum (small-growth) investors are more (less) risk-averse than the large-cap investor. Our findings can reconcile the procyclical expected market returns in survey data with the countercyclical expected returns implied by rational expectations models.

Keywords: asset pricing, beliefs, preferences, heterogeneity, business cycle, rational expectations, behavioral finance, smoothed empirical likelihood

JEL Classification: C51, E3, E70, G12, G14, G40

Suggested Citation

Ghosh, Anisha and Korteweg, Arthur G. and Xu, Qing, Recovering Heterogeneous Beliefs and Preferences from Asset Prices (December 13, 2022). Available at SSRN: https://ssrn.com/abstract=3650199 or http://dx.doi.org/10.2139/ssrn.3650199

Anisha Ghosh

McGill University ( email )

1001 Sherbrooke St. W
Montreal, Quebec H3A 1G5
Canada

Arthur G. Korteweg (Contact Author)

University of Southern California - Marshall School of Business ( email )

3670 Trousdale Parkway
Los Angeles, CA 90089
United States

HOME PAGE: http://www.marshall.usc.edu/personnel/arthur-korteweg

Qing Xu

McGill University, Desautels Faculty of Management, Students ( email )

1001 Sherbrooke St. West
Montreal
Canada

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