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Journal article
Does Belief Heterogeneity Explain Asset Prices: The Case of the Longshot Bias
The Review of economic studies, v 82(1), pp 156-186
01 Jan 2015
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Abstract
This article studies belief heterogeneity in a benchmark competitive asset market: a market for Arrow-Debreu securities. We show that differences in agents' beliefs lead to a systematic pricing pattern, the favourite-longshot bias (FLB): securities with a low-pay-out probability are overpriced, whereas securities with high probability pay-out are underpriced. We apply demand estimation techniques to betting market data, and find that the observed FLB is explained by a two-type population consisting of canonical traders, who hold virtually correct beliefs and are the majority type in the population (70%); and noise traders exhibiting significant belief dispersion. Furthermore, exploiting variation in public information across markets in our data set, we show that our belief heterogeneity model empirically outperforms existing preference-based explanations of the FLB.
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Details
- Title
- Does Belief Heterogeneity Explain Asset Prices: The Case of the Longshot Bias
- Creators
- Amit GandhiRicardo Serrano-Padial
- Publication Details
- The Review of economic studies, v 82(1), pp 156-186
- Publisher
- Oxford University Press
- Resource Type
- Journal article
- Language
- English
- Academic Unit
- Economics (School of Economics)
- Web of Science ID
- WOS:000350114400005
- Scopus ID
- 2-s2.0-84928951480
- Other Identifier
- 991021807015004721
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- Web of Science research areas
- Economics