Heterogeneous beliefs, asset prices, and business cycles

Saki Bigio, Dejanir Silva, Eduardo Zilberman

Journal of Financial Economics · 2026 · Volume 185

DOI: 10.1016/j.jfineco.2026.104382

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 firmâs 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.

Keywords

Asset prices, Business cycles, Heterogeneous beliefs, Speculation

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