Subjective beliefs estimators and their properties

Ghosh, Anisha and Otsu, Taisuke ORCID: 0000-0002-2307-143X (2025) Subjective beliefs estimators and their properties. Review of Finance. ISSN 1572-3097 (In Press)

Text (Ghosh_Otsu2024) - Accepted Version Pending embargo until 1 January 2100. Available under License Creative Commons Attribution. Download (2MB)

Abstract

Information-theoretic methods recover investors’ subjective beliefs by minimizing the statistical discrepancy between beliefs and the DGP, subject to assets’ Euler constraints. We show that the estimated beliefs converges in probability to its pseudo-true value. Comparing estimators in the Cressie-Read family, we show that the exponential tilting and empirical likelihood estimators produce qualitatively similar estimates of the risk aversion levels and beliefs. The quadratic divergence estimator leads to negative subjective probabilities, implausibly large risk aversion levels, and underestimation of left tail risk. Our results suggest large institutional investors, like pension funds, have countercyclical beliefs about the market return, while extrapolative investors have procyclical beliefs. Our results offer an alternative explanation of the momentum effect in stock returns, help reconcile procyclical beliefs reported in individual investor surveys versus countercyclical beliefs implied by rational expectations representative agent models, and establish the information-theoretic approach as a powerful methodology for the recovery of beliefs.

Item Type:	Article
Additional Information:	© 2025 The Author(s)
Divisions:	Economics
Subjects:	H Social Sciences > HB Economic Theory H Social Sciences > HG Finance Q Science > QA Mathematics
JEL classification:	C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C51 - Model Construction and Estimation G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency; Event Studies
Date Deposited:	31 Oct 2025 17:03
Last Modified:	03 Nov 2025 09:21
URI:	http://eprints.lse.ac.uk/id/eprint/130027

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