Opposite Sides of a Skewed Bet: Implications and Evidence for Forecast Dispersion and Returns

Abstract

I test the predictions of a new asset pricing model regarding the interaction of ex-ante return skewness and the dispersion of analysts’ earnings forecasts on a sample of U.S. stocks. I present evidence that skewness and forecast dispersion have an interactive pricing impact, that forecast dispersion has no marginal impact unless stocks exhibit ex-ante skewness, and that higher risk or risk aversion is associated with a deepening of their joint effect. The average return gap between stocks in the 5th and 95th percentiles by skewness and dispersion is 1.61% monthly (19.3% annualized). These otherwise anomalous discoveries comprise new cross-sectional features of expected stock returns.

Keywords: ex-ante skewness, analyst forecast dispersion, investor beliefs, microstructure influences in asset pricing

JEL Classification: G12, D53, D82