Stock price impact of diversity in investor beliefs

ABSTRACT

I re-examine the association between diverse investor beliefs and stock prices within the context of an imperfect competition model. The relationship is ambiguous because of several different effects of a change in diversity in investor beliefs. This has implications for empirical design and explains why 40 years of evidence on this association is inconclusive.

KEYWORDS:

• Diverse beliefs
• returns
• correlated signals

JEL CLASSIFICATION:

• G12
• G14

Acknowledgments

I thank participants at the VICIF 2018 in Saigon, IIT Kharagpur and IIM Bangalore.

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

¹ Proposition 1 below will let us back-substitute for $\lambda$ in Lemma 1, but for this paper, that serves little purpose, and so to avoid a long expression in Lemma 1, I describe each investor’s strategy in terms of $\lambda$.

² Details omitted here for brevity are available from the author upon request. The solution algorithm follows Kyle (1985) and Caballe and Krishnan (1994).

³ The data was drawn from https://www.nseindia.com/products/content/all_daily_reports.htm.