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  • 2022
  • Working Paper

Heterogeneous Investors and Stock Market Fluctuations

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

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More from the Authors
  • The Fed and the Secular Decline in Interest Rates By: Sebastian Hillenbrand
  • Nonbank Lending and Credit Cyclicality By: Quirin Fleckenstein, Manasa Gopal, German Gutierrez and Sebastian Hillenbrand
  • International Trade and Social Connectedness By: Michael Bailey, Abhinav Gupta, Sebastian Hillenbrand, Theresa Kuchler, Robert J. Richmond and Johannes Stroebel
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