The Interaction of Skewness and Analysts' Forecast Dispersion in Asset Pricing

57 Pages Posted: 6 Jan 2017

Date Written: January 3, 2017

Abstract

I develop a new asset pricing theory that bridges two seemingly unrelated pricing effects from separate literatures: (1) the negative relationship between ex-ante return skewness and expected returns and (2) the negative relationship between dispersion in financial analysts' earnings forecasts and expected returns. I show that both effects arise intrinsically from market clearing of stochastic demand in a standard noisy rational expectations economy that incorporates skewed assets followed by financial analysts. Positive correlation between forecast dispersion and investor heterogeneity arises endogenously. The theory generates several novel testable predictions regarding the interaction of ex-ante skewness and forecast dispersion on asset prices.

Keywords: ex-ante skewness, analyst forecast dispersion, investor belief heterogeneity, rational expectations, microstructure influences in asset pricing

JEL Classification: G12, D53, D82

Suggested Citation

Goulding, Christian L., The Interaction of Skewness and Analysts' Forecast Dispersion in Asset Pricing (January 3, 2017). Available at SSRN: https://ssrn.com/abstract=2893832 or http://dx.doi.org/10.2139/ssrn.2893832

Christian L. Goulding (Contact Author)

Research Affiliates, LLC ( email )

620 Newport Center Dr
Suite 900
Newport Beach, CA 92660
United States

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