Dispersion Of Beliefs Research Articles

Belief disagreement and debt maturity structure

This paper examines how investors’ belief disagreement affects the firm’s debt maturity choice. We find that in the presence of belief disagreement, the firm prefers short-term debt to long-term debt. This is because short-term debt is less risky and can attract more optimistic investors, which raises the debt price and reduces the cost of debt financing. Our result is stronger when long-term debt is more risky compared to short-term debt and investors’ belief dispersion is higher.

Nominal exchange rates and heterogeneous beliefs

We propose a two-country model with heterogeneous beliefs to understand dynamics of nominal exchange rate. Facing a shock to monetary policy, disagreement between domestic and foreign investors shifts the relative wealth of investors – an essential part of the stochastic discount factor in our model – which then moves the foreign exchange rate. Calibrated to U.S. and U.K. data, our model reveals that dispersion in beliefs predicts the future spot exchange rate, associates with the cross-section of currency risk premia, and comoves with the time-varying volatility in currency returns. Furthermore, our model suggests that domestic investors would hold fewer foreign currency-denominated bonds in countries with greater disagreements on monetary policy.

Dispersion of Beliefs Bounds: Sentimental Recovery

We present a nonparametric method to recover a bound on ex ante dispersion of beliefs (DBB) from asset prices with minimal assumptions. DBB constrains the dispersion among all possible distributions in an economy, consistent with observed prices and subject to a good-deal bound. In model-based economies, DBB effectively tracks belief heterogeneity and serves as a diagnostic tool for evaluating model calibrations. Empirically, DBB relates to common proxies of belief dispersion, offering a real-time, market-implied disagreement measure. Our versatile approach applies to both complete and incomplete markets represented by any asset class. This paper was accepted by Kay Giesecke, finance. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2022.01587 .

Investor Agreement and the Volume Response to Information

Abstract In this research, an empirical model, which proposes that informational events affect trading volume due to heterogeneous reactions and heterogeneous prior expectations, is tested. Belief dispersion both across and within two sub-groups that proxy for those who own and do not own a given security are measured. The impact of this dispersion on trading volume is also tested. The results suggest that both heterogeneous priors and heterogeneous reactions affect trading volume. However, it is found that any change (positive or negative) in dispersion across groups with heterogeneous prior expectations will result in an increase in trading volume.

Beliefs about social norms and gender-based polarization of COVID-19 vaccination readiness

Social norms affect a wide range of behaviors in society. We conducted a representative experiment to study how beliefs about the existing social norm regarding COVID-19 vaccination affect vaccination readiness. Beliefs about the norm are on average downward biased, and widely dispersed. Randomly providing information about the existing descriptive norm succeeds in correcting biased beliefs, thereby reducing belief dispersion. The information has no effect on vaccination readiness on average, which is due to opposite effects among women (positive) and men (negative). Fundamental differences in how women and men process the same information are likely the cause for these contrasting information effects. Control-group vaccination intentions are lower among women than men, so the information reduces polarization by gender. Additionally, the information reduces gendered polarization in policy preferences related to COVID-19 vaccination.

Emergency Preparation and Uncertainty Persistence

Unusual events trigger persistent spikes in uncertainty. Standard models cannot match these dynamic patterns. This paper presents a unified framework, motivated by the literature on inattention. Agents choose whether and how to prepare for different possible states of the world by collecting information. Agents optimally ignore sufficiently unlikely events, so the occurrence of such events does not resolve, but rather increases, uncertainty. Uncertain agents have dispersed beliefs, making it harder to focus future preparation. Thus, uncertainty begets uncertainty for an inattentive agent, endogenously persisting. In a financial application, this framework matches patterns in volatility, volume of trade, belief dispersion, and spreads. This paper was accepted by Victoria Ivashina, finance. Supplemental Material: The data file is available at https://doi.org/10.1287/mnsc.2023.4836 .

ESG Rating Dispersion and Expected Stock Return in China

ABSTRACT ESG rating dispersion has left responsible investors in great confusion and posed non-negligible barriers to sustainable investment. Despite its importance, there is a lack of research on the role of ESG rating dispersion in portfolio decisions and asset pricing for the Chinese capital market. We reveal the negative return predictability of ESG rating dispersion, which cannot be solely attributed to common risk exposures. We also consider two potential mechanisms based on institutional investor demand and belief dispersion underlying this negative relation. Our findings have important practical implications for asset managers seeking to optimize financial performance while investing responsibly.

A geometric Blackwell’s order

I present a geometric version of Blackwell’s order related to the dispersion of posterior beliefs induced by an experiment. I show that , when the posterior beliefs are affinely independent on the probability space, a more informative experiment corresponds to a more dispersed distribution of posterior beliefs.

How Fast Do Investors Learn? Asset Management Investors and Bayesian Learning

Abstract We study the speed with which investors learn about managers’ skills by examining how quickly investor and managers’ beliefs converge. After showing our measure proxies for the change in the dispersion of beliefs, we find that hedge fund investors learn as fast as suggested by Bayes’ rule. However, we find mutual fund investors learn more slowly than suggested by Bayes’ rule. Mutual fund investors’ slow learning is not due to the use of different performance measures, institutional frictions, or lack of sophistication, but could be due to a low payoff from learning. Our results indicate learning speed depends on financial participants’ incentives. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Belief Dispersion and Convex Cost of Adjustment in the Stock Market and in the Real Economy

I develop a continuous-time general equilibrium model with a continuum of states of the world and a continuum of agents endowed with heterogeneous beliefs. The model permits to analyze the interactions between financial markets and production. There is a single firm that faces convex adjustment costs and maximizes its terminal value. Equivalently, the firm uses decreasing returns to scale risk-return technology. The model is tractable and matches many of the empirical regularities in aggregate output and stock prices, such as a financial volatility that is higher than the macroeconomic volatility, skewness, kurtosis, short-term momentum, and volatility risk premium during recessions. All these aspects disappear when one assumes beliefs homogeneity or constant returns to scale. In particular, the impact of beliefs heterogeneity observed in endowment economies does not pertain when introducing production unless one assumes decreasing returns to scale in the risk-return technology. This paper was accepted by David Sraer, finance. Supplemental Material: The online appendix is available at https://doi.org/10.1287/mnsc.2022.4495 .

ANALYST FORECAST DISPERSION, INVESTOR SENTIMENT, AND THE CROSS-SECTION OF STOCK RETURNS

This paper explores the role investor sentiment plays in the relationship between analyst forecast dispersion and stock returns. With short sale constraints, stock prices are determined by the optimistic investors. There are more optimistic investors during the high sentiment periods when investors suffer more from psychological bias. This is the first paper to document that following the high sentiment periods, stocks with the most analyst forecast dispersion are overpriced, earning significantly negative returns, while those with the least analyst forecast dispersion are not overpriced as the degree of belief dispersion is low. However, following the low sentiment periods, both are not overpriced. A portfolio that longs the least dispersed stocks and shorts the most dispersed stocks yields significantly positive returns only following the high sentiment periods. My findings can potentially reconcile the puzzling risk effect and mispricing effect in the literature. The risk (mispricing) effect suggests a positive (negative) relation between analyst forecast dispersion and future stock returns. Presumably, the magnitude of the mispricing effect depends on the proportion of irrational investors and their bias, which is positively related to investor sentiment. During the high sentiment period, the mispricing effect takes over, and the overall effect is negative. During the low sentiment period, the percentage of irrational investors is mediate, and the mispricing effect and the risk effect counter each other, leading to insignificant relation.

Individual investors' dispersion in beliefs and stock returns

AbstractWe construct a measure of dispersion in beliefs among individual investors. We find that dispersion in beliefs negatively predicts future cross‐sectional stock returns, and it is positively related to trading volume and stock volatility. We also find that illiquidity does not affect the significance of dispersion in beliefs in predicting future stock return, and that the negative disagreement‐return relation is significant under high‐sentiment periods but becomes insignificant under low‐sentiment periods. Moreover, investor characteristics affect their dispersion in beliefs even when controlling firm fundamentals. In particular, stocks with more wealthy, younger, and male investors tend to have higher dispersion in beliefs, and stocks with more experienced investors have lower dispersion in beliefs.

Local and Non-local Investors’ Belief Dispersion and Stock Performance

Local and Non-local Investors’ Belief Dispersion and Stock Performance

Coronavirus Perceptions and Economic Anxiety

Abstract We provide one of the first systematic assessments of the development and determinants of economic anxiety at the onset of the coronavirus pandemic. Using a global data set on internet searches and two representative surveys from the United States, we document a substantial increase in economic anxiety during and after the arrival of the coronavirus. We also document a large dispersion in beliefs about the pandemic risk factors of the coronavirus and demonstrate that these beliefs causally affect individuals' economic anxieties. Finally, we show that individuals' mental models of infectious disease spread understate nonlinear growth and shape the extent of economic anxiety.

The COVID-19 pandemic, volatility, and trading behavior in the bitcoin futures market

This paper contributes to the literature on the coronavirus (COVID-19) pandemic impacts on the Bitcoin futures (BTCF) market and to the ongoing consideration of the dynamic relationship between volatility (or returns) and trading behavior variables, such as volume and open interest as a proxy for belief dispersion. This paper focuses on the role of the unprecedented market stress induced by the COVID-19 pandemic in the interrelations among the variables. Accordingly, this paper proposes a structural change (SC)-VAR-MGARCH model and finds the COVID-19 pandemic has initiated a significant regime change. Furthermore, the relationship between the variables in the pre-pandemic regime is notably unclear, whereas an increase in belief dispersion in the pandemic regime due to market stress reduces BTCF returns but raises trading volume and volatility evidently. The outcomes in the pandemic regime are remarkably consistent with the difference of opinions model, though existing evidence on the dynamic relations is ambiguous. Moreover, the outcomes support our hypothesis that, in addition to information flows, market stress causing traders’ behavioral biases should be considered as one of the crucial factors of tremendous price variability.

Sidedness in the interbank market

We study the motivations of traders in the interbank market around the 2007–2009 subprime crisis. We extend the market sidedness of Sarkar and Schwartz (2009) to a panel setting to study the dispersion of beliefs for banks domiciled in different European countries. We find that country-level sidedness reveals information from the interbank market: sidedness leads sovereign credit default swap (CDS) spreads and reacts to central bank interventions introduced during the crisis. Our results map the linkages between the interbank market and sovereigns, as well as provide insight on the channels that give rise to the sovereign-bank nexus.

Economic fluctuations and pseudo-wealth

Abstract What can explain the large changes in aggregate demand that occur in the absence of any seemingly corresponding shock to the underlying state variables of the economy? We show that macroeconomic volatility can arise from dispersions of beliefs among agents. Such dispersion gives rise to bets and other trades in speculative assets. Such trades give rise to pseudo-wealth, wealth that individuals believe they have on the basis of expectations of returns on these gambles. In the aggregate, when there are enough opportunities for trade and large enough dispersions in beliefs, this perceived wealth may be dangerously untethered to either market wealth or the real wealth of the economy. Given the increased dispersion in beliefs that naturally arises from unprecedented shocks, the theory of pseudo-wealth provides new understandings of both the origins of unanticipated fluctuations and their magnitude, markedly different from prevailing theories grounded in common knowledge and beliefs among individuals. This paper explores the empirical and theoretical underpinnings of pseudo-wealth, links the concept to observed macroeconomic fluctuations, and lays out a research agenda that might help us better understand the role of pseudo-wealth and the circumstances in which it is pronounced.

Bayesian learning with variable prior

How much can be learned from a noisy signal about the state of the world not only depends on the accuracy of the signal, but also on the distribution of the prior. Therefore, we define a general information system as a tuple consisting of both a signal technology and a prior. In this paper we develop a learning order for general information systems and characterize the order in two different ways: first, in terms of the dispersion of posterior beliefs about state quantiles and, second, in terms of the value of learning for two different classes of decision makers. The first class includes all agents with quasi-linear quantile preferences, and the second class contains all agents with supermodular quantile preferences.

Presidential Address: How Much “Rationality” Is There in Bond‐Market Risk Premiums?

ABSTRACTBeliefs of professional forecasters are benchmarked against those of a Bayesian econometrician who is learning about the unknown dynamics of the bond risk factors. Consistent with rational Bayesian learning, the forecast errors of individual professionals and are comparably predictable over the business cycle. The secular and cyclical patterns of professionals' forecasts relative to those of are explored in depth. Inconsistent with many models with belief dispersion, the relationship between professionals' yield disagreement and their matched disagreements about macroeconomic fundamentals is very weak.

Whose Disagreement Matters? Household Belief Dispersion and Stock Trading Volume

Abstract Theoretical models have long recognized the role of investor disagreements in the marketplace, but little evidence is documented regarding how belief dispersion affects trading activities in the broad equity market. Using over three decades of data from a survey of US households, we introduced a novel measure of household macroeconomic belief dispersion and document its positive relationship with market-wide stock trading volume, even after controlling for an array of professional analysts’ belief dispersion. Results are more pronounced for the belief dispersion among households who are more likely to own stocks. Furthermore, we show that the household belief dispersion is priced in the cross-section of stock returns, whereas that among professional analysts is not.