A0904
Title: Investor beliefs and trading frictions
Authors: Sofonias Alemu Korsaye - Johns Hopkins University (United States) [presenting]
Abstract: A theoretical framework is developed to identify investors' subjective beliefs consistent with survey expectations and asset prices in markets with trading frictions. A metric is introduced to quantify the deviation of these beliefs from rational expectations (RE), interpretable as a bound on the difference between the maximum Sharpe ratios under investors' beliefs and RE. Empirically, it is shown that a significant share of the deviation from RE assessed, assuming frictionless markets, can be attributed to small trading costs. This deviation and the impact of trading costs differ across investor characteristics, with sophisticated investors' expectations more closely aligning with asset prices.
