Pricing News and No News with Heterogeneous Beliefs
Series
SFI Research Paper; 25-61
Type
discussion paper
Date Issued
2025-06-10
Author(s)
Gao, Can
;
Brandon Yueyang Han
Abstract
We study a general-equilibrium economy where agents trade assets and derivatives with heterogeneous beliefs along two dimensions: news intensity and content. When intensity disagreement dominates, implied volatility is persistent: quiet periods shift wealth toward calm-world believers, compressing risk-neutral tail probabilities and raising prices. The information structure of the news process governs the persistence of intensity disagreement: in a Poisson limit, intensity disagreement lasts, whereas in a Brownian limit it is eliminated. When content disagreement dominates, volatility is mean-reverting: news shifts wealth between optimists and pessimists. Our framework rationalizes the implied volatility smirk and derivative positions across subjective return beliefs.
Language
English (United States)
HSG Classification
None
Refereed
No
Division(s)