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New evidence on the effect of belief heterogeneity on stock returns

Author

Listed:
  • Jeffrey Hobbs

    () (Appalachian State University)

  • Hei Wai Lee

    () (University of Michigan-Dearborn)

  • Vivek Singh

    () (University of Michigan-Dearborn)

Abstract

Abstract We develop a new measure to examine the effect of the heterogeneity of beliefs among investors on stock returns. Our initial results do not support the information asymmetry hypothesis or the sidelined investor hypothesis (and thus are consistent with the unbiased prices hypothesis). However, since the first two hypotheses make opposite predictions regarding stock returns, they may both have merit but offset one another. Further analysis suggests that this is indeed the case. Overall, our results support both the information asymmetry and sidelined investor hypotheses and thus occupy middle ground in the debate on the effect of disagreement on stock returns.

Suggested Citation

  • Jeffrey Hobbs & Hei Wai Lee & Vivek Singh, 2017. "New evidence on the effect of belief heterogeneity on stock returns," Review of Quantitative Finance and Accounting, Springer, vol. 48(2), pages 289-309, February.
  • Handle: RePEc:kap:rqfnac:v:48:y:2017:i:2:d:10.1007_s11156-016-0551-7
    DOI: 10.1007/s11156-016-0551-7
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    References listed on IDEAS

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    More about this item

    Keywords

    Institutional investors; Divergence of opinion; Sidelined investors; Shorting constraints; Information asymmetry; Unbiased prices;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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