Do Heterogeneous Beliefs Matter for Asset Pricing?

Abstract

We study how heterogeneous beliefs affect returns and examine whether they are a priced factor in traditional asset pricing models. To accomplish this task, we suggest new empirical measures based on the disagreement among analysts about expected earnings (short-term and long-term) and show they are good proxies. We first establish that the heterogeneity of beliefs matters for asset pricing and then turn our attention to estimating a structural model in which we use the forecasts of financial analysts to proxy for agents` beliefs. Finally, we investigate whether the amount of heterogeneity in analysts` forecasts can help explain asset pricing puzzles.

Keywords: time optimal control problems, Neumann parabolic equations with an infinite number of variables, Dubovitskii-Milyutin theorem, conical approximations, optimality conditions, Weierstrass theorem