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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.

Suggested Citation

  • Massimo Massa & William Goetzmann, 2001. "Dispersion of Opinion and Stock Returns: Evidence from Index Fund Investors," Yale School of Management Working Papers ysm227, Yale School of Management, revised 01 May 2003.
    • Handle: RePEc:ysm:wpaper:ysm227
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