Dispersion of Opinion and Stock Returns
AbstractWe use a panel of more than 100,000 investor accounts in US stocks over the period 1991-1995 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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Yale School of Management in its series Yale School of Management Working Papers with number ysm444.
Date of creation: 12 Apr 2005
Date of revision:
Dispersion of opinion; asset prices; volatility;
Other versions of this item:
- D10 - Microeconomics - - Household Behavior - - - General
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
This paper has been announced in the following NEP Reports:
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Stephen Morris, .
"Speculative Investor Behavior and Learning,"
Penn CARESS Working Papers
d12f7936881423171f6589501, Penn Economics Department.
- Stephen Morris, 1996. "Speculative investor behavior and learning," Working Papers 96-5, Federal Reserve Bank of Philadelphia.
- Stephen Morris, . ""Speculative Investor Behavior and Learning''," CARESS Working Papres 95-13, University of Pennsylvania Center for Analytic Research and Economics in the Social Sciences.
- Joseph Chen & Harrison Hong & Jeremy C. Stein, 2001.
"Breadth of Ownership and Stock Returns,"
NBER Working Papers
8151, National Bureau of Economic Research, Inc.
- Kraus, Alan & Smith, Maxwell, 1989. " Market Created Risk," Journal of Finance, American Finance Association, vol. 44(3), pages 557-69, July.
- J. Bradford De Long & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, .
"Noise Trader Risk in Financial Markets,"
J. Bradford De Long's Working Papers
_124, University of California at Berkeley, Economics Department.
- Malcolm Baker & Jeffrey Wurgler, 2004.
"Investor Sentiment and the Cross-Section of Stock Returns,"
NBER Working Papers
10449, National Bureau of Economic Research, Inc.
- Malcolm Baker & Jeffrey Wurgler, 2006. "Investor Sentiment and the Cross-Section of Stock Returns," Journal of Finance, American Finance Association, vol. 61(4), pages 1645-1680, 08.
- Miller, Edward M, 1977. "Risk, Uncertainty, and Divergence of Opinion," Journal of Finance, American Finance Association, vol. 32(4), pages 1151-68, September.
- Wang, Jiang, 1959- & He, Hua., 1994.
"Differential information and dynamic behavior of stock trading volume,"
3731-94., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- He, Hua & Wang, Jiang, 1995. "Differential Information and Dynamic Behavior of Stock Trading Volume," Review of Financial Studies, Society for Financial Studies, vol. 8(4), pages 919-72.
- Hua He & Jiang Wang, 1995. "Differential Information and Dynamic Behavior of Stock Trading Volume," NBER Working Papers 5010, National Bureau of Economic Research, Inc.
- Hua He and Jiang Wang., 1993. "Differential Information and Dynamic Behavior of Stock Trading Volume," Research Program in Finance Working Papers RPF-228, University of California at Berkeley.
- Brad M. Barber & Terrance Odean, 2002. "Online Investors: Do the Slow Die First?," Review of Financial Studies, Society for Financial Studies, vol. 15(2), pages 455-488, March.
- Terrance Odean, 1998. "Are Investors Reluctant to Realize Their Losses?," Journal of Finance, American Finance Association, vol. 53(5), pages 1775-1798, October.
- Karl B. Diether & Christopher J. Malloy & Anna Scherbina, 2002. "Differences of Opinion and the Cross Section of Stock Returns," Journal of Finance, American Finance Association, vol. 57(5), pages 2113-2141, October.
- Brad M. Barber & Terrance Odean, 2000. "Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors," Journal of Finance, American Finance Association, vol. 55(2), pages 773-806, 04.
- Terrance Odean, 1999. "Do Investors Trade Too Much?," American Economic Review, American Economic Association, vol. 89(5), pages 1279-1298, December.
- Williams, Joseph T., 1977. "Capital asset prices with heterogeneous beliefs," Journal of Financial Economics, Elsevier, vol. 5(2), pages 219-239, November.
- Charles M.C. Lee & Bhaskaran Swaminathan, 2000. "Price Momentum and Trading Volume," Journal of Finance, American Finance Association, vol. 55(5), pages 2017-2069, October.
- Naik, Narayan Y., 1997. "On aggregation of information in competitive markets: The dynamic case," Journal of Economic Dynamics and Control, Elsevier, vol. 21(7), pages 1199-1227, June.
- Wang, Jiang, 1993. "A Model of Intertemporal Asset Prices under Asymmetric Information," Review of Economic Studies, Wiley Blackwell, vol. 60(2), pages 249-82, April.
- Brad M. Barber & Terrance Odean, 2001. "Boys Will Be Boys: Gender, Overconfidence, And Common Stock Investment," The Quarterly Journal of Economics, MIT Press, vol. 116(1), pages 261-292, February.
- Harris, Milton & Raviv, Artur, 1993. "Differences of Opinion Make a Horse Race," Review of Financial Studies, Society for Financial Studies, vol. 6(3), pages 473-506.
- 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.
- Xiaoquan Jiang, 2010. "Return dispersion and expected returns," Financial Markets and Portfolio Management, Springer, vol. 24(2), pages 107-135, June.
- 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.).
- 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.).
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.