Analyst Coverage and Two Puzzles in the Cross Section of Returns
69 Pages Posted: 18 Mar 2011 Last revised: 4 Feb 2013
Date Written: January 30, 2013
We examine a stylized version of Miller's (1977) hypothesis as the explanation of the puzzling ndings of both Chordia, Subrahmanyam and Anshuman (2001) and Ang, Hodrick, Xing and Zhang (2006). Identifying stocks that are prone to disagreement by using low analyst coverage produces results that are strongly consistent with the model's predictions.
The low returns to high return volatility stocks are corrections of optimistic mispricing that arises because information arrivals generate disagreement among traders. Disagreement also implies a negative relation between returns and shocks to trading volume. The abnormal returns to a trading strategy based on idiosyncratic return volatility are explained by the returns to a strategy based on turnover volatility, suggesting that the same economic forces underlie both relations as the model predicts.
Keywords: Idiosyncratic Volatility, Turnover Volatility, Disagreement, Mispricing
JEL Classification: G12, G14
Suggested Citation: Suggested Citation