Macro Disagreement and the Cross-Section of Stock Returns

Review of Asset Pricing Studies, Forthcoming

54 Pages Posted: 12 Apr 2014 Last revised: 19 Apr 2016

See all articles by Frank Weikai Li

Frank Weikai Li

Singapore Management University - Lee Kong Chian School of Business

Date Written: July 1, 2015

Abstract

This paper examines the effects of macro-level disagreement on the cross-section of stock returns. Using forecast dispersion measure from Survey of Professional Forecasters database, I find that when forecast dispersion on macroeconomic factor is high, stocks that have high loadings on that factor earn lower future returns relative to stocks with low loadings and vice versa. This negative relationship between risk premium of macro-factors and macro-level disagreement is robust and exists for a large set of macroeconomic risk factors. These findings are consistent with the model of Hong and Sraer (2015), where high beta stocks are more prone to speculative mispricing than low beta stocks due to their greater sensitivity to aggregate disagreement, resulting in lower subsequent returns for high beta stocks during high aggregate disagreement states.

Keywords: Macro Disagreement, Macroeconomic Risk Factors, Mispricing, Behavioral Finance

JEL Classification: D03, G12

Suggested Citation

Li, Frank Weikai, Macro Disagreement and the Cross-Section of Stock Returns (July 1, 2015). Review of Asset Pricing Studies, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2423758 or http://dx.doi.org/10.2139/ssrn.2423758

Frank Weikai Li (Contact Author)

Singapore Management University - Lee Kong Chian School of Business ( email )

469 Bukit Timah Road
Singapore 912409
Singapore

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