IFin Seminar, Pascal Maenhout, INSEAD - "Robustness and Dynamic Sentiment"
Institute of Finance
Date: 27.05.2021 / 12:25 - 13:25
Speaker: Pascal Maenhout, INSEAD
Title: “Robustness and Dynamic Sentiment"
Date: May 27, 2021
Time: 12:25 - 13:25
Errors in survey expectations display waves of pessimism and optimism and significant sluggishness. This paper develops a novel theoretical framework of time-varying beliefs capturing these empirical facts. In our model, the dynamic beliefs arise endogenously due to agents’ attitude toward alternative models. Decision-maker’s distorted beliefs generate countercyclical risk aversion, procyclical portfolio weights, countercyclical equilibrium asset returns, and excess volatility. A calibrated version of our model is shown to match salient features in equity markets.