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Sentiment and Speculation in a Market with Heterogeneous Beliefs
February 27, 2019 @ 2:30 pm - 3:30 pm
![2/27/2019 Colloquium](https://cmsa.fas.harvard.edu/media/CMSA-Colloquium-022719-e1550767365109.png)
Speaker: Ian Martin (LSE)
Title: Sentiment and Speculation in a Market with Heterogeneous Beliefs
Abstract: We present a dynamic model featuring risk-averse investors with heterogeneous beliefs. Individual investors have stable beliefs and risk aversion, but agents who were correct in hindsight become relatively wealthy; their beliefs are overrepresented in market sentiment, so “the market” is bullish following good news and bearish following bad news. Extreme states are far more important than in a homogeneous economy. Investors understand that sentiment drives volatility up, and demand high risk premia in compensation. Moderate investors supply liquidity: they trade against market sentiment in the hope of capturing a variance risk premium created by the presence of extremists. [Joint work with Dimitris Papadimitriou]