Skip to Main Content
HBS Home
  • About
  • Academic Programs
  • Alumni
  • Faculty & Research
  • Baker Library
  • Giving
  • Harvard Business Review
  • Initiatives
  • News
  • Recruit
  • Map / Directions
Faculty & Research
  • Faculty
  • Research
  • Featured Topics
  • Academic Units
  • …→
  • Harvard Business School→
  • Faculty & Research→
Publications
Publications
  • 2022
  • Working Paper

Heterogeneous Investors and Stock Market Fluctuations

By: Odhrain McCarthy and Sebastian Hillenbrand
  • Format:Print
  • | Language:English
  • | Pages:63
ShareBar

Abstract

We introduce a heterogeneous agent model which features extrapolative beliefs and time-varying risk aversion. The model leads to an empirical framework which we estimate with stock prices, survey data and risk aversion measures. We find that extrapolative beliefs and risk aversion are important drivers of stock prices together explaining 86% of movements in the S&P500 index: extrapolative cash flow expectations explain 34%, extrapolative return expectations explain 23% and time-variation in risk aversion explains 29%. We also find that stock prices would vary by roughly 70% less if all investors were to hold rational beliefs. Our work highlights that investor heterogeneity and the use of survey data to measure their beliefs are key to understanding asset prices.

Keywords

Stock Market; Investment Decisions; Asset Pricing; Investment; Behavioral Finance; Stocks

Citation

McCarthy, Odhrain, and Sebastian Hillenbrand. "Heterogeneous Investors and Stock Market Fluctuations." Working Paper, January 2022.
  • SSRN

About The Author

Sebastian Hillenbrand

Finance
→More Publications

More from the Authors

    • May 2024 (Revised February 2025)
    • Faculty Research

    Cost of Capital at DraftKings

    By: Malcolm Baker and Sebastian Hillenbrand
    • 2024
    • Faculty Research

    Valuing Stocks With Earnings

    By: Sebastian Hillenbrand and Odhrain McCarthy
    • 2023
    • Faculty Research

    The Optimal Stock Valuation Ratio

    By: Sebastian Hillenbrand and Odhrain McCarthy
More from the Authors
  • Cost of Capital at DraftKings By: Malcolm Baker and Sebastian Hillenbrand
  • Valuing Stocks With Earnings By: Sebastian Hillenbrand and Odhrain McCarthy
  • The Optimal Stock Valuation Ratio By: Sebastian Hillenbrand and Odhrain McCarthy
ǁ
Campus Map
Harvard Business School
Soldiers Field
Boston, MA 02163
→Map & Directions
→More Contact Information
  • Make a Gift
  • Site Map
  • Jobs
  • Harvard University
  • Trademarks
  • Policies
  • Accessibility
  • Digital Accessibility
Copyright © President & Fellows of Harvard College.