Structural estimation of behavioral heterogeneity

We develop a behavioral asset pricing model in which agents trade in a market with information friction. Profit-maximizing agents switch between trading strategies in response to dynamic market conditions. Owing to noisy private information about the fundamental value, the agents form different evaluations about heterogeneous strategies. We exploit a thin set—a small sub-population—to point identify this nonlinear model, and estimate the structural parameters using extended method of moments. Based on the estimated parameters, the model produces return time series that emulate the moments of the real data. These results are robust across different sample periods and estimation methods.