Journal of Financial Economics Vol. 163 2025
Robustness and dynamic sentiment
Abstract
Errors in survey expectations display waves of pessimism and optimism. This paper develops a novel theoretical framework of time-varying beliefs capturing this fact. In our model, dynamic beliefs arise endogenously due to agents’ attitude towards alternative models. Decision-maker’s distorted beliefs generate countercyclical risk aversion, procyclical portfolio weights, and countercyclical equilibrium asset returns. A calibrated version of our model is shown to jointly match salient features in survey data and equity markets.
- DOI
- 10.1016/j.jfineco.2024.103953
- Volume
- 163
- Pages
- 103953
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref