This service is more advanced with JavaScript available, learn more at http: We show the dynamics of diverse beliefs is the primary propagation mechanism of volatility in asset markets. Hence, we treat the characteristics of the market beliefs as a primary, primitive, explanation of market volatility. We study an economy with stock and riskless bond markets and formulate a financial equilibrium model with diverse and time varying beliefs.

Macroeconomic determinants of stock market volatility and volatility risk-premiums - WRAP: Warwick Research Archive Portal

Also, our model explains the presence of stochastic volatility in asset prices and returns. Two properties of beliefs drive market volatility: This research was supported by a grant of the Smith Richardson Foundation to the Stanford Institute for Economic Policy Research SIEPR.

We thank Kenneth Judd for constant advice which was crucial at several points in the development of this work. We also thank Kenneth Arrow, Min Fan, Michael Magill, Carsten Nielsen, Manuel Santos, Nicholas Yannelis, Ho-Mou Wu and Woody Brock for comments on earlier drafts. This revised version was published online in January with corrections to the Cover date.

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