Dispersion of Beliefs, Ambiguity, and the Cross-Section of Stock Returns

42 Pages Posted: 2 Apr 2019

See all articles by Deok-Hyeon Lee

Deok-Hyeon Lee

Korea Development Bank

Byoung-Kyu Min

Hanyang University

Tong Suk Kim

College of Business, Korea Advanced Institute of Science and Technology (KAIST)

Date Written: April 22, 2017

Abstract

We examine whether ambiguity is priced in the cross-section of expected stock returns. Using the cross-sectional dispersion in real-time forecasts of real GDP growth as a measure for ambiguity, we find that high ambiguity beta stocks earn lower future returns relative to low ambiguity beta stocks. This negative predictive relation between the ambiguity beta and future returns is consistent with theory, which predicts the marginal utility of consumption to rise when ambiguity is high. We further show that the ambiguity premium remains significant after controlling for exposures to expected real GDP growth, VIX, and financial market dislocations index.

Keywords: Ambiguity, Dispersion of Beliefs, Stock Returns

JEL Classification: G12, G14

Suggested Citation

Lee, Deok-Hyeon and Min, Byoung-Kyu and Kim, Tong Suk, Dispersion of Beliefs, Ambiguity, and the Cross-Section of Stock Returns (April 22, 2017). Journal of Empirical Finance, Vol. 50, 2019, Available at SSRN: https://ssrn.com/abstract=3349934

Deok-Hyeon Lee

Korea Development Bank ( email )

16-3 Yeouido-Dong, Yeongdeungpo-Gu
Seoul, 150-973
Korea, Republic of (South Korea)

Byoung-Kyu Min (Contact Author)

Hanyang University ( email )

Seoul
Korea, Republic of (South Korea)

Tong Suk Kim

College of Business, Korea Advanced Institute of Science and Technology (KAIST) ( email )

85 Hoegiro, Dongdaemoon-gu
Seoul 02455
Korea, Republic of (South Korea)

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