Weighting Investor Beliefs by Market Shares Unlocks Volatility Signal

A cross-country study published in Financial Innovation argues that explaining why some markets swing more violently than others requires looking beyond “belief gaps” between investor types. Researchers use an extended heterogeneous agent model across twelve developed and emerging equity markets from 2010 to 2023. They find that a composition-weighted measure of investor heterogeneity—accounting for how many investors hold each belief—tracks realized volatility strongly and consistently, while the conventional belief gap alone does not. The model follows a fundamentalist-chartist framework where investors switch forecasting rules based on relative performance, making market shares evolve endogenously. The dataset includes 3,586 daily observations per market, with the Russia series truncated at end-2021 due to data issues.