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

  • Massimo Massa
  • William Goetzmann

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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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
Contact details of provider: Web page: http://icf.som.yale.edu/

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