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Heterogeneous Beliefs, Asset Prices, and Business Cycles

Author

Listed:
  • Saki Bigio
  • Dejanir Silva
  • Eduardo Zilberman

Abstract

This paper develops a complete-market production economy with heterogeneous beliefs about TFP growth. Hiring occurs before TFP is known and is, therefore, risky (operational leverage). The firm's discount factor depends on a wealth-weighted average of investors' beliefs. Waves of optimism influence asset markets and percolate to labor hiring, tying together the equity premium, equity volatility, and labor volatility puzzles. A taxonomy of belief systems shows that only extrapolative beliefs amplify the volatility of asset prices and hours and lead to risk build up. Disciplined by survey data, the model matches asset-pricing and business-cycle moments, highlighting how heterogeneous beliefs can be a direct driver of aggregate fluctuations.

Suggested Citation

  • Saki Bigio & Dejanir Silva & Eduardo Zilberman, 2025. "Heterogeneous Beliefs, Asset Prices, and Business Cycles," NBER Working Papers 33672, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:33672
    Note: AP EFG ME
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    More about this item

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E71 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on the Macro Economy
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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