Heterogeneous expectations in asset pricing: Empirical evidence from the S&P500

• We develop and estimate a heterogeneous agent model for the equity market.
• Estimation results reveal fundamentalists, chartists, and noise trader behavior.
• Especially switching between strategies helps to improve the fit of the model.
• The model is capable of explaining bubbles and crashes in financial markets.

This paper empirically assesses heterogeneous expectations in asset pricing. We use a maximum likelihood approach on S&P500 data to estimate a structural model. Our empirical results are consistent with a market populated with fundamentalists and chartists. In addition, agents switch between these groups conditional on their previous performance. The results imply that the model can explain the inflation and deflation of bubbles. Finally, the model is shown to be in the deterministically stable region, but produces stochastic bubbles of similar length and magnitude as empirically observed.