Does Belief Heterogeneity Explain Asset Prices: The Case of the Longshot Bias

• 成果类型: Article
• 署名作者: Gandhi, Amit; Serrano-Padial, Ricardo
• 署名单位: University of Wisconsin System; University of Wisconsin Madison
• 刊物名称: REVIEW OF ECONOMIC STUDIES
• ISSN/ISSBN: 0034-6527
• DOI: 10.1093/restud/rdu017
• 发表日期: 2015
• 页码: 156-186
• 关键词: rational-expectations; MARKET; RISK; INFORMATION; preferences; traders; noise; love; odds

摘要

This article studies belief heterogeneity in a benchmark competitive asset market: a market for Arrow-Debreu securities. We show that differences in agents' beliefs lead to a systematic pricing pattern, the favourite-longshot bias (FLB): securities with a low-pay-out probability are overpriced, whereas securities with high probability pay-out are underpriced. We apply demand estimation techniques to betting market data, and find that the observed FLB is explained by a two-type population consisting of canonical traders, who hold virtually correct beliefs and are the majority type in the population (70%); and noise traders exhibiting significant belief dispersion. Furthermore, exploiting variation in public information across markets in our data set, we show that our belief heterogeneity model empirically outperforms existing preference-based explanations of the FLB.