Heterogeneity of Trade and Stock Returns. Evidence from Index Fund Investors

37 Pages Posted: 9 Feb 2001  

Massimo Massa

INSEAD - Finance

William N. Goetzmann

Yale School of Management - International Center for Finance; National Bureau of Economic Research (NBER)

Date Written: March 2001

Abstract

We address the issue of how the heterogeneity of trade among investors affects stock returns. We model and test the relationship between dispersion of opinion, heterogeneity of trade and stock returns. The empirical investigation makes use of a two-year panel of more than 91 thousand individual accounts in an S&P 500 index mutual fund. We show that dispersion of opinion, proxied by the heterogeneity of trade among investors, explains part of the returns not accounted for by the fundamentals. We analytically and empirically show that the explanatory power of the dispersion of opinion increases at the very time when standard pricing models based on fundamentals fare worse.

Keywords: Index Funds, Heterogeneity of Beliefs, Learning

JEL Classification: G12, G14, G22

Suggested Citation

Massa, Massimo and Goetzmann, William N., Heterogeneity of Trade and Stock Returns. Evidence from Index Fund Investors (March 2001). Yale ICF Working Paper No. 00-28. Available at SSRN: https://ssrn.com/abstract=258761 or http://dx.doi.org/10.2139/ssrn.258761

Massimo Massa (Contact Author)

INSEAD - Finance ( email )

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+33 1 6072 4045 (Fax)

William N. Goetzmann

Yale School of Management - International Center for Finance ( email )

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203-436-9252 (Fax)

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National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
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