Disagreement, Skewness, and Asset Prices

41 Pages Posted: 23 Nov 2021 Last revised: 2 May 2022

See all articles by Christian L. Goulding

Christian L. Goulding

Research Affiliates, LLC

Shrihari Santosh

University of Colorado at Boulder - Department of Finance

Xingtan Zhang

University of Colorado at Boulder - Department of Finance

Date Written: April 30, 2022

Abstract

We develop a new asset pricing theory that bridges two seemingly unrelated anomalies: (1) the negative relationship between dispersion in financial analysts’ earnings forecasts and expected returns and (2) the negative relationship between ex-ante skewness and expected returns. The results obtain because (1) empirically, most stocks have positive expected ex-ante skewness, (2) positive skewness implies that investors' demand schedules are convex in the relevant price range, and (3) because of convexity, trades due to disagreement do not ``cancel out", and asset prices are inflated, even in a setup without short-selling constraints. Our theory further predicts that skewness and dispersion have an interactive pricing impact. We find support for this prediction in the cross section of stock returns.

Keywords: the dispersion effect; the skewness effect; divergence of opinions

JEL Classification: G12, D53, D82

Suggested Citation

Goulding, Christian L. and Santosh, Shrihari and Zhang, Xingtan, Disagreement, Skewness, and Asset Prices (April 30, 2022). Available at SSRN: https://ssrn.com/abstract=3967556 or http://dx.doi.org/10.2139/ssrn.3967556

Christian L. Goulding

Research Affiliates, LLC ( email )

620 Newport Center Dr
Suite 900
Newport Beach, CA 92660
United States

Shrihari Santosh

University of Colorado at Boulder - Department of Finance ( email )

Campus Box 419
Boulder, CO 80309
United States

Xingtan Zhang (Contact Author)

University of Colorado at Boulder - Department of Finance ( email )

Campus Box 419
Boulder, CO 80309
United States

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