Heterogeneity in Beliefs and Volatility tails


Bakshi G, Madan D, Panayotov G. Heterogeneity in Beliefs and Volatility tails. Journal of Financial and Quantitative Analysis [Internet]. 2015.

Date Published:



We propose a model of volatility tail behavior, in which the pricing measure dominates the physical measure in both tails of the volatility distribution and, hence, the derived pricing kernel exhibits an increasing and decreasing region in the volatility dimension. The model features investors who have heterogeneity in beliefs about volatility outcomes, and maximize their utility by choosing volatility-contingent cash flows. Our empirical examination appears to suggest that the model is better suited to mimic the data counterparts in the left tail of the volatility distribution, both qualitatively and quantitatively.

Publisher's Version