Beliefs Aggregation and Return Predictability

81 Pages Posted: 6 Nov 2015 Last revised: 30 Mar 2020

See all articles by Albert S. Kyle

Albert S. Kyle

University of Maryland

Anna A. Obizhaeva

New Economic School (NES)

Yajun Wang

City University of NY, Baruch College, Zicklin School of Business

Date Written: March 29, 2020

Abstract

We study return predictability using a model of speculative trading among relatively overconfident competitive traders who agree to disagree about the precision of their private information. Although traders apply Bayes Law consistently, returns are predictable. In addition to trading on long-term fundamental value, traders also trade on perceived short-term opportunities arising from foreseen future disagreement, as in a Keynesian beauty contest. Contradicting conventional wisdom, this short-term speculation dampens rather than magnifies price fluctuations relative to fundamentals, generating time-series momentum. Consistent with model predictions, we find empirically more pronounced momentum for stocks with higher trading volume.

Keywords: asset pricing, predictability, market microstructure, market efficiency, momentum, mean-reversion, anomalies, agreement to disagree

JEL Classification: B41, D8, G02, G12, G14

Suggested Citation

Kyle, Albert (Pete) S. and Obizhaeva, Anna A. and Wang, Yajun, Beliefs Aggregation and Return Predictability (March 29, 2020). Available at SSRN: https://ssrn.com/abstract=2639231 or http://dx.doi.org/10.2139/ssrn.2639231

Albert (Pete) S. Kyle

University of Maryland ( email )

College Park
College Park, MD 20742
United States

Anna A. Obizhaeva (Contact Author)

New Economic School (NES) ( email )

100A Novaya ul
Moscow, Skolkovo 143026
Russia

Yajun Wang

City University of NY, Baruch College, Zicklin School of Business ( email )

One Bernard Baruch Way
New York, NY 10010
United States

HOME PAGE: http://sites.google.com/site/yajunwangfin/

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
343
Abstract Views
2,147
rank
112,528
PlumX Metrics