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Dispersion of Opinion and Stock Returns: Evidence from Index Fund Investors

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  • Massimo Massa
  • William Goetzmann

Abstract

We address the issue of how heterogeneity of trade among investors affects stock returns. We develop a model of the dispersion of opinion among investors that has implications for asset pricing. We test the relationship between dispersion of investor opinion and stock returns using a two-year panel of more than 91 thousand individual accounts in a S&P 500 index fund. We show that dispersion of opinion, proxied by the heterogeneity of trade among investor classes, explains part of the returns not accounted for by standard asset pricing factors. We show that the explanatory power of the dispersion of opinion increases at the very time when standard pricing models based on standard asset pricing factors fare worse.

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File URL: http://icfpub.som.yale.edu/publications/2606
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Bibliographic Info

Paper provided by Yale School of Management in its series Yale School of Management Working Papers with number ysm227.

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Date of creation: 01 Oct 2001
Date of revision: 01 May 2003
Handle: RePEc:ysm:somwrk:ysm227

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Web page: http://icf.som.yale.edu/
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Related research

Keywords: Learning; Asset Pricing; Market Confidence; Behavioral Finance;

References

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  12. Massimo Massa & William N. Goetzmann, 1999. "Index Funds and Stock Market Growth," Yale School of Management Working Papers ysm23, Yale School of Management.
  13. De Long, J. Bradford & Shleifer, Andrei & Summers, Lawrence H. & Waldmann, Robert J., 1990. "Noise Trader Risk in Financial Markets," Scholarly Articles 3725552, Harvard University Department of Economics.
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  17. Kyle, Albert & Campbell, John, 1993. "Smart Money, Noise Trading and Stock Price Behaviour," Scholarly Articles 3208217, Harvard University Department of Economics.
  18. Lakonishok, Josef & Shleifer, Andrei & Vishny, Robert W., 1992. "The impact of institutional trading on stock prices," Journal of Financial Economics, Elsevier, vol. 32(1), pages 23-43, August.
  19. Hau, Harald, 1998. "Competitive Entry and Endogenous Risk in the Foreign Exchange Market," Review of Financial Studies, Society for Financial Studies, vol. 11(4), pages 757-87.
  20. Balduzzi, Pierluigi & Bertola, Giuseppe & Foresi, Silverio, 1995. " Asset Price Dynamics and Infrequent Feedback Trades," Journal of Finance, American Finance Association, vol. 50(5), pages 1747-66, December.
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  23. Brennan, Michael J & Jegadeesh, Narasimhan & Swaminathan, Bhaskaran, 1993. "Investment Analysis and the Adjustment of Stock Prices to Common Information," Review of Financial Studies, Society for Financial Studies, vol. 6(4), pages 799-824.
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