Microeconomics: General Equilibrium & Disequilibrium Models of Financial Markets eJournal | 2021
Dynamics of Asset Demands with Confidence Heterogeneity
Abstract
To understand the dynamics of investor asset demands, we develop a multiperiod general-equilibrium model driven by a single latent variable, differences in beliefs, resulting from heterogeneity in investors confidence regarding the return dynamics of assets. Consistent with the data, investors asset holdings are concentrated and display large and persistent heterogeneity in asset demands across investors. Moreover, demand curves are steeper than with homogeneous beliefs. The time-series and cross-sectional variation in assets realized and expected returns, as well as their volatilities, are driven by the mean and dispersion of latent demand.