N°25-61: No News is News: Volatility Speculation and Multidimensional Heterogeneous Beliefs

This paper develops a theoretical model to explore the asset pricing implications of investors’ multi-dimensional belief heterogeneity, specifically distinguishing between disagreements over the frequency of news arrival and the content of news. Besides directional trades, investors could use derivatives to bet against each other and speculate on volatility: greater disagreement of this kind could give rise to more extreme derivative positions. When disagreement about news arrival frequency is low, volatility exhibits mean reversion because extreme optimists and pessimists incur substantial wealth losses amid intense market swings. In contrast, high disagreement about the news arrival rate leads to volatility persistence. If news is absent in such environments, volatility sellers dominate, and extreme payoffs are underweighted in the formation of market expectations, resulting in lower implied volatility—“no news” effectively becomes good news for risky asset valuations.