Journal of Financial Economics· 2026Q1
Heterogeneous beliefs, asset prices, and business cycles
- 1citations
- Q1SCImago
- 2026year
Short summary
A new production economy model shows that heterogeneous investor beliefs about productivity growth directly influence asset prices and business cycles, with extrapolative beliefs uniquely amplifying economic fluctuations.
AI-generated from the title and abstract; the full text is not read.
Key points
- Heterogeneous beliefs about productivity growth affect asset prices and business cycles in a new production economy model.
- Operating leverage amplifies firms' exposure to productivity risk because hiring precedes productivity realization.
- Investor optimism compresses risk premia and raises employment; pessimism triggers contractions.
- Extrapolative beliefs are the only type that generate amplification and endogenous risk build-up.
- The model jointly matches key asset-pricing, trading-volume, and business-cycle moments, disciplined by survey expectations.
AI-generated from the title and abstract; the full text is not read.
Abstract
We develop a complete-market production economy in which heterogeneous beliefs about productivity growth affect both asset prices and real activity. Firms must hire workers before productivity is realized, so operating leverage increases the exposure of profits to productivity risk. Because the firm’s discount factor depends on a wealth-weighted aggregation of investor beliefs, shifts in optimism compress risk premia and raise employment, while reversals trigger contractions. This mechanism generates an equilibrium feedback between asset prices, hiring, and risk exposure. A taxonomy of belief systems shows that only extrapolative beliefs produce amplification and endogenous risk build-up. Disciplined by survey expectations, the model jointly matches key asset-pricing, trading-volume, and business-cycle moments.
The authors' abstract, as published at the source. Journal of Financial Economics, 2026 · DOI ↗
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Field: Economics and Econometrics
Economics and EconometricsEconomics, Econometrics and Finance