Dispersion in Options Investors’ Versus Analysts’ Expectations: Predictive Inference for Stock Returns

35 Pages Posted: 17 Jan 2014 Last revised: 15 Aug 2019

See all articles by Panayiotis C. Andreou

Panayiotis C. Andreou

Cyprus University of Technology

Anastasios Kagkadis

Lancaster University - Department of Accounting and Finance

Paulo F. Maio

Hanken School of Economics - Department of Finance and Statistics

Dennis Philip

Durham University - Department of Economics and Finance

Multiple version iconThere are 2 versions of this paper

Date Written: August 14, 2019

Abstract

We create a market-wide measure of dispersion in options investors’ expectations by aggregating across all stocks the dispersion in trading volume across moneynesses (DISP). DISP exhibits strong negative predictive power for future market returns and its information content is not subsumed by several alternative equity premium predictors. Consistent with the implications of theoretical models that link dispersion to overpricing, the predictive power of DISP is particularly pronounced in relatively optimistic periods. Although an aggregate analysts’ forecasts dispersion (AFD) measure also performs well in optimistic periods, it delivers insignificant overall predictability. This is because in the aftermath of the 2008 financial crisis, AFD was heavily driven by pessimistic forecasts and hence its increase did not reflect a true overpricing. As a result, AFD does not appear to be a robust equity premium predictor in recent years.

Keywords: Dispersion in beliefs; Predictability of stock returns; Equity premium; Trading volume dispersion; Out-of-sample predictability; Economic signi ficance

JEL Classification: G10; G11; G12

Suggested Citation

Andreou, Panayiotis C. and Kagkadis, Anastasios and Maio, Paulo F. and Philip, Dennis, Dispersion in Options Investors’ Versus Analysts’ Expectations: Predictive Inference for Stock Returns (August 14, 2019). Available at SSRN: https://ssrn.com/abstract=2379606 or http://dx.doi.org/10.2139/ssrn.2379606

Panayiotis C. Andreou

Cyprus University of Technology ( email )

School Of Management and Economics
P.O. Box 50329
Lemesos, 3036
Cyprus

HOME PAGE: http://www.pandreou.com

Anastasios Kagkadis

Lancaster University - Department of Accounting and Finance ( email )

The Management School
Lancaster LA1 4YX
United Kingdom

Paulo F. Maio (Contact Author)

Hanken School of Economics - Department of Finance and Statistics ( email )

FI-00101 Helsinki
Finland

HOME PAGE: http://sites.google.com/site/paulofmaio/home

Dennis Philip

Durham University - Department of Economics and Finance ( email )

Department of Economics and Finance
Mill Hill Lane
Durham, DH1 3LB
United Kingdom

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