Disagreement in the Equity Options Market and Stock Returns

Abstract

We estimate investor disagreement from synthetic long and short stock trades in the equity options market. We show that high disagreement predicts low stock returns after positive earnings surprises and high stock returns after negative earnings surprises. The negative effect is stronger for high-beta stocks and stocks that are more difficult to sell short. In the cross-section of all stocks and the subset of the 500 largest companies, high disagreement robustly predicts low monthly and weekly stock returns.

Keywords: Disagreement, dispersion of beliefs, equity options, stock returns, earnings surprises

JEL Classification: G12, G13, G14