Abstract
This paper analyzes a model of difference-of-opinion regarding signal precision with belief uncertainty in stock and option, and there is a positive feedback effect from subjective belief to realized signal precision. Option price contains a negative uncertainty premium, the magnitude of which increases with the level of difference-of-opinion, measured by the variation of agents' confidence levels. This framework draws sharp implications that the trading volume in the stock is negatively related to volatility risk premium -- the difference between implied and expected volatilities, and positively related to implied volatility. We empirically confirm these implications with nine major futures markets of stocks, bonds, and currencies.
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