How do Heterogeneous Beliefs Influence Asset Volatility?

Authors

  • Hwai-Chung Ho,

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    • Academia Sinica and National Taiwan University
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  • Chien-Chih Lin

    1. Tamkang University
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    • Note: Correction added on 23 October 2012 after first publication online on 10 October 2012 in Pacific Economic Review Volume 17, Number 4. The affiliation for Chien-Chih Lin should read ‘Tamkang University’ and not ‘Asia University’. The error has been corrected in this version of the article.

Address for Correspondence: Institute of Statistical Science, Academia Sinica, and Department of Finance, National Taiwan University, Taipei 11529, Taiwan. E-mail: hcho@stat.sinica.edu.tw.

Abstract

We investigate the influence of heterogeneous beliefs on asset volatility when agents' degrees of confidence differ. With a continuous-time model subsuming agent's heterogeneous beliefs in the expected increase in dividends, a stock price formula is derived. Based on this formula, the stock volatility is computed via Monte Carlo simulation. The results show that the influence of belief heterogeneity in expectation on volatility depends on the confident agents' level of optimism. Empirical results are also provided.

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