Disagreement in Economic Forecasts and Equity Returns: Risk or Mispricing?
59 Pages Posted: 12 Mar 2014 Last revised: 2 Jan 2020
Date Written: August 1, 2019
We quantify disagreement about the economy with ex-ante measures of cross-sectional dispersion in economic forecasts, and investigate if economic disagreement has a significant impact on the cross-sectional pricing of individual stocks. We find a significant disagreement premium of 7.2% per annum, induced by the outperformance (underperformance) by stocks with negative (positive) disagreement beta, suggesting that ambiguity-averse investors demand higher compensation to hold stocks with higher disagreement risk. The results also support the mispricing hypothesis that the positive (negative) disagreement beta provides an indirect way to measure dispersed opinion and overpricing (underpricing). Thus, the risk- and mispricing-based explanations of the disagreement premium are not mutually exclusive.
Keywords: dispersion in economic forecasts, mispricing, disagreement risk, cross-section of stock returns, return predictability
JEL Classification: G11, G12, C13, E20, E30
Suggested Citation: Suggested Citation