Heterogeneous Beliefs Model of Stock Market Predictability
Fuente:
arXiv
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| Format: | Preprint |
| Veröffentlicht: |
2024
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| _version_ | 1866929383560708096 |
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| author | Park, Jiho |
| author_facet | Park, Jiho |
| contents | This paper proposes a theory of stock market predictability patterns based on a model of heterogeneous beliefs. In a discrete finite time framework, some agents receive news about an asset's fundamental value through a noisy signal. The investors are heterogeneous in that they have different beliefs about the stochastic supply. A momentum in the stock price arises from those agents who incorrectly underestimate the signal accuracy, dampening the initial price impact of the signal. A reversal in price occurs because the price reverts to the fundamental value in the long run. An extension of the model to multiple assets case predicts co-movement and lead-lag effect, in addition to cross-sectional momentum and reversal. The heterogeneous beliefs of investors about news demonstrate how the main predictability anomalies arise endogenously in a model of bounded rationality. |
| format | Preprint |
| id |
arxiv_https___arxiv_org_abs_2406_08448 |
| institution | arXiv |
| publishDate | 2024 |
| record_format | arxiv |
| spellingShingle | Heterogeneous Beliefs Model of Stock Market Predictability Park, Jiho Pricing of Securities General Finance Trading and Market Microstructure This paper proposes a theory of stock market predictability patterns based on a model of heterogeneous beliefs. In a discrete finite time framework, some agents receive news about an asset's fundamental value through a noisy signal. The investors are heterogeneous in that they have different beliefs about the stochastic supply. A momentum in the stock price arises from those agents who incorrectly underestimate the signal accuracy, dampening the initial price impact of the signal. A reversal in price occurs because the price reverts to the fundamental value in the long run. An extension of the model to multiple assets case predicts co-movement and lead-lag effect, in addition to cross-sectional momentum and reversal. The heterogeneous beliefs of investors about news demonstrate how the main predictability anomalies arise endogenously in a model of bounded rationality. |
| title | Heterogeneous Beliefs Model of Stock Market Predictability |
| topic | Pricing of Securities General Finance Trading and Market Microstructure |
| url | https://arxiv.org/abs/2406.08448 |