Predictability Concentrates in Bad Times. And so Does Disagreement

Discussion Papers on Business and Economics, University of Southern Denmark, 8/2019

27 Pages Posted: 31 Aug 2019

See all articles by Thiago de Oliveira Souza

Thiago de Oliveira Souza

University of Southern Denmark; Danish Finance Institute

Multiple version iconThere are 2 versions of this paper

Date Written: June 26, 2019

Abstract

Within a standard risk-based asset pricing framework with rational expectations, realized returns have two components: Predictable risk premiums and unpredictable shocks. In bad times, the price of risk increases. Hence, the predictable fraction of returns – and predictability – increases. “Disagreement” (dispersion in analyst forecasts) also intensifies in bad times if (i) analysts report (close to) risk-neutral expectations weighted by state prices, which become more volatile, or (ii) dividend volatility changes with the price of risk – for example, because consumption volatility changes. In both cases, individual analysts produce unbiased forecasts based on partial information.

Suggested Citation

de Oliveira Souza, Thiago, Predictability Concentrates in Bad Times. And so Does Disagreement (June 26, 2019). Discussion Papers on Business and Economics, University of Southern Denmark, 8/2019, Available at SSRN: https://ssrn.com/abstract=3410365 or http://dx.doi.org/10.2139/ssrn.3410365

Thiago De Oliveira Souza (Contact Author)

University of Southern Denmark ( email )

Campusvej 55
DK-5230 Odense, 5000
Denmark

Danish Finance Institute ( email )

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