"Volatility, Investor Uncertainty, and Dispersion"



In this paper, we focus on investor expectations of future stock market returns. We motivate theoretically and prove empirically that future market return variance can be decomposed into the average individual variance plus the dispersion in individual mean returns. To provide empirical evidence, we set up a unique survey among investing clients of a large Dutch bank measuring their expectations for future return variance. This finding is of fundamental importance to the issue of aggregating heterogeneous beliefs at the micro level in relation to pricing in financial markets. For instance, as a result it is almost per definition that individual investors are found to be overconfident in the sense of overly narrow forecast bounds due to neglecting individual differences of opinion about mean market returns.
Contact information:
Sebastian Gryglewicz
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