Dynamics of Asset Demands with Confidence Heterogeneity
53 Pages Posted: 22 Sep 2021
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Dynamics of Asset Demands with Confidence Heterogeneity
Investor Sophistication and Portfolio Dynamics
Date Written: August 2021
Abstract
To understand the dynamics of investor asset demands, we develop a multiperiod general-equilibrium model driven by a single latent variable, differences in beliefs, resulting from heterogeneity in investors' confidence regarding the return dynamics of assets. Consistent with the data, investors' asset holdings are concentrated and display large and persistent heterogeneity in asset demands across investors. Moreover, demand curves are steeper than with homogeneous beliefs. The time-series and cross-sectional variation in assets' realized and expected returns, as well as their volatilities, are driven by the mean and dispersion of latent demand.
Keywords: asset-demand elasticity, Institutional asset demand, investors' expectations, predictability, trend chasing
JEL Classification: D53, G11, G12
Suggested Citation: Suggested Citation