Dispersion of Opinion and Stock Returns: Evidence from Index Fund Investors

37 Pages Posted: 1 Oct 2001  

Massimo Massa

INSEAD - Finance

William N. Goetzmann

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

Date Written: August 2001

Abstract

We address the issue of how heterogeneity of trade among investors affects stock returns. We develop a model of the dispersion of opinion among investors that has implications for asset pricing. We test the relationship between dispersion of investor opinion and stock returns using a two-year panel of more than 91 thousand individual accounts in a S&P 500 index fund. We show that dispersion of opinion, proxied by the heterogeneity of trade among investor classes, explains part of the returns not accounted for by standard asset pricing factors. We show that the explanatory power of the dispersion of opinion increases at the very time when standard pricing models based on standard asset pricing factors fare worse.

Keywords: Learning, Asset Pricing, Market Confidence, Behavioral Finance

JEL Classification: G11,G12,G14

Suggested Citation

Massa, Massimo and Goetzmann, William N., Dispersion of Opinion and Stock Returns: Evidence from Index Fund Investors (August 2001). Yale ICF Working Paper No. 00-55. Available at SSRN: https://ssrn.com/abstract=285776 or http://dx.doi.org/10.2139/ssrn.285776

Massimo Massa

INSEAD - Finance ( email )

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William N. Goetzmann (Contact Author)

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

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