Disagreement Beta

42 Pages Posted: 17 Jun 2016 Last revised: 7 Oct 2018

See all articles by George Gao

George Gao

T. Rowe Price; Cornell University - Samuel Curtis Johnson Graduate School of Management

Xiaomeng Lu

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF)

Zhaogang Song

Johns Hopkins University - Carey Business School

Hongjun Yan

DePaul University

Date Written: October 1, 2018

Abstract

When two investors agree to disagree on market prospects and bet against each other, both expect to profit from their trades. Hence, an increase in disagreement leads to higher perceived trading profits and lower marginal utilities for both investors, so disagreement betas can affect cross-sectional asset returns. We construct a disagreement measure using professional forecasts of U.S. macroeconomic fundamentals. Betas with respect to this disagreement factor positively explain cross-sectional returns of stocks, corporate bonds, mortgage-backed securities, and government securities. Further tests using portfolio-based test assets confirm the significant pricing power of the disagreement factor on top of influential benchmark factors.

Keywords: Disagreement, heterogeneous beliefs, speculation, asset pricing

JEL Classification: G10, G12, G13, F37

Suggested Citation

Gao, George and Lu, Xiaomeng and Song, Zhaogang and Yan, Hongjun, Disagreement Beta (October 1, 2018). Journal of Monetary Economics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2796203 or http://dx.doi.org/10.2139/ssrn.2796203

George Gao

T. Rowe Price ( email )

Baltimore, MD 21297-1215
United States

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Sage Hall 314
Ithaca, NY 14853
United States

Xiaomeng Lu

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF) ( email )

Shanghai Jiao Tong University
211 West Huaihai Road
Shanghai, 200030
China

Zhaogang Song (Contact Author)

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

Hongjun Yan

DePaul University ( email )

1 East Jackson Blvd.
Chicago, IL 60604
United States

HOME PAGE: http://sites.google.com/view/hongjunyan

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