We study a general-equilibrium economy where a continuum of agents have heterogeneous beliefs along two dimensions: the intensity and the content of news. When intensity disagreement dominates, implied volatility appears persistent—quiet periods shift wealth toward calm-world believers, compressing risk-neutral probability of extreme events and raising asset prices. When content disagreement dominates, volatility appears mean-reverting—news shift wealth between optimists and pessimists. The information structure of news process matters for the persistence of intensity disagreement: in a Poisson limit, intensity disagreement can last but it is eliminated in a Brownian limit. The framework endogenizes implied volatility smirk and U-shaped cross-section of derivative positions across pessimists and optimists.
SAFE Working Paper No. 451
