67 Pages Posted: 6 Oct 2014 Last revised: 8 Jul 2016
Date Written: July 2016
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 significance
JEL Classification: G10, G11, G12
Suggested Citation: 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=2506052 or http://dx.doi.org/10.2139/ssrn.2506052