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Applied Economics Letters Volume 18, 2011 - Issue 10
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Original Articles

Influence of heterogeneous beliefs on volatility when agents' degree of confidence differs

Hwai-Chung Ho Academia Sinica, Institute of Statistical Science, Taipei, 11529, Taiwan; Department of Finance, National Taiwan University, Taipei, 11529, TaiwanCorrespondence[email protected]
&
Chien-Chih Lin Department of Banking and Finance, Tamkang University, 151, Ying-Chuan Road, Tamsui, Taipei County, 25137, Taiwan
Pages 955-959 | Published online: 24 Jan 2011
 
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Abstract

This study provides theoretical and empirical evidences of the effects of heterogeneous beliefs on asset volatility when agents' level of confidence differs. We derive a stock price formula that is applied to simulating stock volatility using Monte Carlo method. Through the simulation results, we observe that the influence of heterogeneous beliefs on volatility depends on the confident agents' level of optimism. Some empirical results are provided to confirm those observations.

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