Disagreement in Economic Forecasts and Expected Stock Returns: Risk or Mispricing?

59 Pages Posted: 12 Mar 2014 Last revised: 22 Feb 2019

See all articles by Turan G. Bali

Turan G. Bali

Georgetown University - Robert Emmett McDonough School of Business

Stephen Brown

New York University (NYU) - Leonard N. Stern School of Business

Yi Tang

Fordham University - Gabelli School of Business

Date Written: February 21, 2019

Abstract

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

Bali, Turan G. and Brown, Stephen and Tang, Yi, Disagreement in Economic Forecasts and Expected Stock Returns: Risk or Mispricing? (February 21, 2019). Georgetown McDonough School of Business Research Paper No. 2407279. Available at SSRN: https://ssrn.com/abstract=2407279 or http://dx.doi.org/10.2139/ssrn.2407279

Turan G. Bali (Contact Author)

Georgetown University - Robert Emmett McDonough School of Business ( email )

3700 O Street, NW
Washington, DC 20057
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(202) 687-5388 (Phone)
(202) 687-4031 (Fax)

HOME PAGE: http://faculty.msb.edu/tgb27/

Stephen Brown

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States

Yi Tang

Fordham University - Gabelli School of Business ( email )

113 West 60th Street
New York, NY 10023
United States

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