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Dispersion of Opinion and Stock Returns

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  • Goetzmann, William
  • Massa, Massimo

Abstract

We use a panel of more than 100,000 investor accounts in US stocks over the period 1991-95 to construct an investor-based measure of dispersion of opinion, unlike the analyst based measure used in the literature. We use this measure to test two competing hypotheses: the sidelined investors hypothesis and the uncertainty/asymmetric information hypothesis. We find evidence that supports the sidelined-investors hypothesis. We show that the dispersion of opinion of the investors in a stock is positively related to the contemporaneous returns and trading volume of the stock and negatively related to its future returns. Moreover, dispersion of opinion aggregates across many stocks and generates factors that have a market-wide effect, affecting the stock equilibrium rate of return and providing additional explanatory power in a standard asset-pricing model. This supports the interpretation of dispersion of opinion as a risk factor. We also show that dispersion of opinion among retail investors Granger causes dispersion of opinion among analysts.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4819.

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Date of creation: Dec 2004
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Handle: RePEc:cpr:ceprdp:4819

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Keywords: asset prices; dispersion of opinion; volatility;

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Cited by:
  1. Dan Li & Geng Li, 2011. "Belief dispersion among household investors and stock trading volume," Finance and Economics Discussion Series 2011-39, Board of Governors of the Federal Reserve System (U.S.).
  2. Wongchoti, Udomsak & Wu, Fei & Young, Martin, 2009. "Buy and sell dynamics following high market returns: Evidence from China," International Review of Financial Analysis, Elsevier, vol. 18(1-2), pages 12-20, March.
  3. Xiaoquan Jiang, 2010. "Return dispersion and expected returns," Financial Markets and Portfolio Management, Springer, vol. 24(2), pages 107-135, June.
  4. Li, Dan & Li, Geng, 2014. "Are Household Investors Noise Traders: Evidence from Belief Dispersion and Stock Trading Volume," Finance and Economics Discussion Series 2014-35, Board of Governors of the Federal Reserve System (U.S.).

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