59 Pages Posted: 17 Jun 2016 Last revised: 20 Mar 2017
Date Written: March 2017
When two investors agree to disagree on economic prospects and bet against each other, they both expect to profit from their trades. Hence, everything else being equal, the disagreement level is positively linked to all investors' perceived profit opportunities, and disagreement betas price cross-sectional asset returns. We construct a disagreement measure based on professional forecasts of U.S. macroeconomic fundamentals. Betas with respect to this single measure explain cross-sectional returns of U.S. assets, such as stocks, corporate bonds, and mortgage-backed securities.
Keywords: Disagreement, heterogeneous beliefs, speculation, asset pricing
JEL Classification: G10, G12, G13, F37
Suggested Citation: Suggested Citation
Gao, George and Lu, Xiaomeng and Song, Zhaogang and Yan, Hongjun, Macro-Disagreement Beta (March 2017). Available at SSRN: https://ssrn.com/abstract=2796203