VGSF - WU Vienna - LC

Ian Martin, London School of Economics

online via Zoom 11:00 - 12:15

Organizer VGSF

As part of the ser­ies of the "Fin­ance Re­search Sem­inar", VGSF wel­comes Ian Martin from Lon­don School of Eco­nom­ics to present his re­search pa­per.
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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.

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