Dispersion in Options Investors' Expectations and Stock Return Predictability

67 Pages Posted: 17 Jan 2014 Last revised: 1 Apr 2017

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 Business School

Multiple version iconThere are 2 versions of this paper

Date Written: July 2016

Abstract

We propose a measure of dispersion in options investors' expectations about future stock returns using the dispersion in trading volume across different moneyness levels. Our dispersion measure exhibits strong negative predictability for excess market returns, and its out-of-sample predictive power is both statistically and economically significant. The results can be explained in the context of a framework where dispersion leads to an overly high stock price and a subsequent downturn. We also demonstrate that our dispersion measure exhibits a similar time series pattern to analysts' forecasts dispersion across the largest part of the sample, while providing consistently superior predictive performance.

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

JEL Classification: G10, G11, G12

Suggested Citation

Andreou, Panayiotis C. and Kagkadis, Anastasios and Maio, Paulo F. and Philip, Dennis, Dispersion in Options Investors' Expectations and Stock Return Predictability (July 2016). 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

Dennis Philip

Durham University Business School ( email )

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

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