Macro-Disagreement Beta

59 Pages Posted: 17 Jun 2016 Last revised: 20 Mar 2017

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

Driehaus College of Business, DePaul University

Date Written: March 2017

Abstract

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

Gao, George and Lu, Xiaomeng and Song, Zhaogang and Yan, Hongjun, Macro-Disagreement Beta (March 2017). Available at SSRN: https://ssrn.com/abstract=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

Driehaus College of Business, DePaul University ( email )

1 East Jackson Blvd.
Chicago, IL 60604
United States

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

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