Robust Identification of Investor Beliefs / Xiaohong Chen, Lars P. Hansen, Peter G. Hansen.

Format:

Book

Author/Creator:

Chen, Xiaohong.

Contributor:

National Bureau of Economic Research.

Hansen, Lars P.

Hansen, Peter G.

Series:

Working Paper Series (National Bureau of Economic Research) no. w27257.

NBER working paper series no. w27257

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2020.

Summary:

This paper develops a new method informed by data and models to recover information about investor beliefs. Our approach uses information embedded in forward-looking asset prices in conjunction with asset pricing models. We step back from presuming rational expectations and entertain potential belief distortions bounded by a statistical measure of discrepancy. Additionally, our method allows for the direct use of sparse survey evidence to make these bounds more informative. Within our framework, market-implied beliefs may differ from those implied by rational expectations due to behavioral/psychological biases of investors, ambiguity aversion, or omitted permanent components to valuation. Formally, we represent evidence about investor beliefs using a novel nonlinear expectation function deduced using model-implied moment conditions and bounds on statistical divergence. We illustrate our method with a prototypical example from macro-finance using asset market data to infer belief restrictions for macroeconomic growth rates.

Notes:

Print version record

May 2020.