Robustness and dynamic sentiment

Pascal J. Maenhout

doi:10.1016/j.jfineco.2024.103953

Robustness and dynamic sentiment

2025-01-01

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DOI：10.1016/j.jfineco.2024.103953

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Abstract

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Errors in survey expectations display waves of pessimism and optimism. This paper develops a novel theoretical framework of time-varying beliefs capturing this fact. In our model, dynamic beliefs arise endogenously due to agents' attitude towards alternative models. Decision-maker's distorted beliefs generate countercyclical risk aversion, procyclical portfolio weights, and countercyclical equilibrium asset returns. A calibrated version of our model is shown to jointly match salient features in survey data and equity markets.

Keywords:

Robust control

Subjective beliefs

Pessimism

Optimism

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Robustness and dynamic sentiment

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