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Influence of heterogeneous beliefs on volatility when agents' degree of confidence differs

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  • Hwai-Chung Ho
  • Chien-Chih Lin

Abstract

This study provides theoretical and empirical evidences of the effects of heterogeneous beliefs on asset volatility when agents' level of confidence differs. We derive a stock price formula that is applied to simulating stock volatility using Monte Carlo method. Through the simulation results, we observe that the influence of heterogeneous beliefs on volatility depends on the confident agents' level of optimism. Some empirical results are provided to confirm those observations.

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  • Hwai-Chung Ho & Chien-Chih Lin, 2011. "Influence of heterogeneous beliefs on volatility when agents' degree of confidence differs," Applied Economics Letters, Taylor & Francis Journals, vol. 18(10), pages 955-959.
    • Handle: RePEc:taf:apeclt:v:18:y:2011:i:10:p:955-959
    DOI: 10.1080/13504851.2010.520659
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    1. Evan W. Anderson & Eric Ghysels & Jennifer L. Juergens, 2005. "Do Heterogeneous Beliefs Matter for Asset Pricing?," The Review of Financial Studies, Society for Financial Studies, vol. 18(3), pages 875-924.
    2. Detemple Jerome & Murthy Shashidhar, 1994. "Intertemporal Asset Pricing with Heterogeneous Beliefs," Journal of Economic Theory, Elsevier, vol. 62(2), pages 294-320, April.
    3. Cox, John C. & Huang, Chi-fu, 1989. "Optimal consumption and portfolio policies when asset prices follow a diffusion process," Journal of Economic Theory, Elsevier, vol. 49(1), pages 33-83, October.
    4. Shefrin, Hersh & Statman, Meir, 1994. "Behavioral Capital Asset Pricing Theory," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 29(3), pages 323-349, September.
    5. Zapatero, Fernando, 1998. "Effects of financial innovations on market volatility when beliefs are heterogeneous," Journal of Economic Dynamics and Control, Elsevier, vol. 22(4), pages 597-626, April.
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    Cited by:

    1. Weining Niu, 2017. "Corporate Financing Under Heterogeneous Beliefs," Annals of Financial Economics (AFE), World Scientific Publishing Co. Pte. Ltd., vol. 12(04), pages 1-12, December.

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