Identifying Beliefs from Asset Prices

89 Pages Posted: 17 Jun 2019 Last revised: 16 Jun 2020

See all articles by Anisha Ghosh

Anisha Ghosh

McGill University

Guillaume Roussellet

McGill University - Desautels Faculty of Management

Date Written: June 10, 2020


We propose a novel procedure to identify the marginal stock market investor’s beliefs from observed asset prices. Our approach recovers price-consistent beliefs, i.e. the distribution of macro and financial variables that satisfy the conditional Euler equations, given a cross-section of assets, a pricing kernel, and a conditioning set. Our procedure is nonparametric, not requiring any
assumptions about the data generating process or investor rationality. The recovered beliefs about consumption growth exhibit non-Gaussianity, strong procyclicality in the mean, flat volatility, and bimodality in recessions. Beliefs about the stock market are countercyclical and correlate with survey data on institutional
investors’ expectations.

Keywords: Rational Expectations, Behavioral Biases, Pricing Kernel, Conditioning Set, Relative Entropy Minimization

JEL Classification: C51, E3, E70, G12, G14, G40

Suggested Citation

Ghosh, Anisha and Roussellet, Guillaume, Identifying Beliefs from Asset Prices (June 10, 2020). Proceedings of Paris December 2019 Finance Meeting EUROFIDAI - ESSEC, Available at SSRN: or

Anisha Ghosh (Contact Author)

McGill University ( email )

1001 Sherbrooke St. W
Montreal, Quebec H3A 1G5

Guillaume Roussellet

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1

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