A1104
Title: The dynamics of subjective risk, risk premia and beliefs
Authors: Alberto Quaini - Erasmus University of Rotterdam (Netherlands) [presenting]
Sofonias Alemu Korsaye - Johns Hopkins University (United States)
Gustavo Freire - Erasmus University of Rotterdam (Netherlands)
Abstract: Asset pricing research traditionally assumes that investors form rational expectations, yet investors' market expectations extracted from survey data are at odds with those predicted by rational expectation models based on market data. This divergence signals a gap in existing asset pricing theories, which are still evolving to accommodate empirical evidence on how investors shape their beliefs. In response to this need, a novel framework is developed to extract information on investors' conditional subjective beliefs about future cash flows from asset prices and survey expectations. The extraction is adaptable, allowing for the integration of diverse economic assumptions ranging from entirely model-free constraints, like good-deal bounds, to fully model-based scenarios, such as those assuming log-utility investors. Empirically, the dynamics of investors' subjective risk, risk premia and beliefs are investigated.
