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Dispersion of Beliefs Bounds: Sentimental Recovery

Author

Listed:
  • Altan Pazarbaşı

    (Faculty of Business Administration, Bilkent University, 06800 Ankara, Turkey)

  • Paul Schneider

    (Universita della Svizzera italiana Lugano and Swiss Finance Institute, 6900 Lugano, Switzerland)

  • Grigory Vilkov

    (Frankfurt School of Finance & Management, 60322 Frankfurt am Main, Germany)

Abstract

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.

Suggested Citation

  • Altan Pazarbaşı & Paul Schneider & Grigory Vilkov, 2024. "Dispersion of Beliefs Bounds: Sentimental Recovery," Management Science, INFORMS, vol. 70(12), pages 8284-8300, December.
    • Handle: RePEc:inm:ormnsc:v:70:y:2024:i:12:p:8284-8300
    DOI: 10.1287/mnsc.2022.01587
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