As part of the series of the "Finance Research Seminar", VGSF welcomes Ian Martin from London School of Economics to present his research paper.
Sentiment and speculation in a market with heterogeneous beliefs
We present a model featuring risk-averse investors with heterogeneous beliefs.Individuals who are correct in hindsight, whether through luck or judgment, be-come relatively wealthy. As a result, market sentiment is bullish following goodnews and bearish following bad news. Sentiment drives up volatility, and hencealso risk premia. In a continuous-time Brownian limit, moderate investors tradeagainst market sentiment in the hope of capturing a variance risk premium createdby the presence of extremists. In a Poisson limit that features sudden arrivals ofinformation, CDS rates spike following bad news and decline during quiet times.