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Dynamics of Asset Demands with Confidence Heterogeneity

Author

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  • Buss, Adrian
  • Vilkov, Grigory
  • Uppal, Raman

Abstract

To understand the dynamics of investor asset demands, we develop a multiperiod general-equilibrium model driven by a single latent variable, differences in beliefs, resulting from heterogeneity in investors' confidence regarding the return dynamics of assets. Consistent with the data, investors' asset holdings are concentrated and display large and persistent heterogeneity in asset demands across investors. Moreover, demand curves are steeper than with homogeneous beliefs. The time-series and cross-sectional variation in assets' realized and expected returns, as well as their volatilities, are driven by the mean and dispersion of latent demand.

Suggested Citation

  • Buss, Adrian & Vilkov, Grigory & Uppal, Raman, 2021. "Dynamics of Asset Demands with Confidence Heterogeneity," CEPR Discussion Papers 16441, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:16441
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    More about this item

    Keywords

    Institutional asset demand; Asset-demand elasticity; Investors' expectations; Trend chasing; Predictability;
    All these keywords.

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • 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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