Dispersion of Beliefs Bounds: Sentimental Recovery

Abstract

We propose new methodology to recover a bound on ex-ante dispersion of beliefs (DBB) consistent with observed asset prices from a set of minimal assumptions. With S&P 500 and VIX derivatives, we show that the recovered DBB crucially depends on market and data incompleteness, and the maximally allowed risk-return trade-off. Empirically, it is related to trading activity, risks in financial markets, investor and consumer surveys, and professional macroeconomic forecasts. DBB may serve to gauge the degree of belief heterogeneity about future states generated by economic models or in empirical data.