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Robustness and dynamic sentiment

Author

Listed:
  • Maenhout, Pascal J.
  • Vedolin, Andrea
  • Xing, Hao

Abstract

Errors in survey expectations display waves of pessimism and optimism. This paper develops a novel theoretical framework of time-varying beliefs capturing this fact. In our model, dynamic beliefs arise endogenously due to agents’ attitude towards alternative models. Decision-maker’s distorted beliefs generate countercyclical risk aversion, procyclical portfolio weights, and countercyclical equilibrium asset returns. A calibrated version of our model is shown to jointly match salient features in survey data and equity markets.

Suggested Citation

  • Maenhout, Pascal J. & Vedolin, Andrea & Xing, Hao, 2025. "Robustness and dynamic sentiment," Journal of Financial Economics, Elsevier, vol. 163(C).
    • Handle: RePEc:eee:jfinec:v:163:y:2025:i:c:s0304405x24001764
    DOI: 10.1016/j.jfineco.2024.103953
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    More about this item

    Keywords

    Robust control; Subjective beliefs; Pessimism; Optimism; Cressie-read;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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