Analyst Disagreement and Aggregate Volatility Risk
43 Pages Posted: 17 Jul 2009 Last revised: 29 Sep 2015
Date Written: August 1, 2012
The paper explains why firms with high dispersion of analyst forecasts earn low future returns. These firms beat the CAPM in periods of increasing aggregate volatility and thereby provide a hedge against aggregate volatility risk. The aggregate volatility risk factor can explain the abnormal return differential between high and low disagreement firms. This return differential is higher for firms with abundant real options, and this fact can be explained by aggregate volatility risk. Aggregate volatility risk can also explain why the link between analyst disagreement and future returns is stronger for firms with high short-sale constraints.
Keywords: Aggregate volatility risk, analyst disagreement, analyst forecasts, real options, mispricing
JEL Classification: G12, G13, G32, E44, D80, M41
Suggested Citation: Suggested Citation