The Size of Disagreement Shock
35 Pages Posted: 17 Aug 2017
Date Written: June 15, 2017
Prior theoretical models on investors’ disagreement and trading volume such as Banerjee and Kremer (2010) and Banerjee (2011) assume the convergence speed of investors’ disagreement is exogenously given and constant over time. This paper extends the prior literature by including the time–varying convergence speed of disagreement. Motivated by our theoretical framework, we propose a novel measure, the size of disagreement shock (SDisp), which is defined as the excess turnover (against historical average trading volume) per unit of the time series standard deviation of trading volume. Consistent with our model implications, we find that SDisp has a strong positive relation with future cross–sectional stock returns and future investors’ disagreement.
Keywords: Disagreement shock, trading volume, stock return
JEL Classification: G12
Suggested Citation: Suggested Citation