Frijns, BHuynh, TZwinkels, RCJ2025-07-022025-07-022025-08-01Journal of Economic Dynamics and Control, ISSN: 0165-1889 (Print), Elsevier BV, 177, 105133-105133. doi: 10.1016/j.jedc.2025.1051330165-1889http://hdl.handle.net/10292/19466We set up an endowment based asset pricing model in which agents have heterogeneous expectations about future price levels. Expectations are a function of fundamentals or trends, both interacted with sentiment. Agents are able to switch between expectation formation functions based on past performance combined with sentiment. Estimation results on the S&P500 index as well as its constituents reveal that there is heterogeneity between agents, with substantial switching between groups. We find that sentiment has both a direct and an indirect effect on expectations. Specifically, heterogeneity between groups is increasing in sentiment, and higher sentiment reduces the frequency of switching between functions. Our results imply that the true expectation formation process is a dynamic process based on multiple information sources.© 2025 The Author(s). Published by Elsevier B.V. Creative Commons. This is an open access article distributed under the terms of the Creative Commons CC-BY license, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. You are not required to obtain permission to reuse this article.https://creativecommons.org/licenses/by/4.0/38 Economics3502 Banking, Finance and Investment3801 Applied Economics35 Commerce, Management, Tourism and Services1401 Economic Theory1402 Applied Economics1502 Banking, Finance and InvestmentEconomics3802 Econometrics3803 Economic theoryExpectation formationInvestor sentimentHeterogeneityJournal ArticleOpenAccess10.1016/j.jedc.2025.105133