Disagreement of Disagreement
80 Pages Posted: 28 Nov 2023 Last revised: 5 Feb 2024
Date Written: September 16, 2024
Abstract
We find remarkably low correlation among major investor disagreement proxies, making it challenging to infer how disagreement impacts prices. We develop a unified model that incorporates these measures into a novel nonlinear composite disagreement measure, which is more predictive of returns than existing measures, and that explains the stronger disagreement--expected return effect for smaller stocks. Decile spread portfolios sorted on our composite measure generate value-weighted alphas of 21% per year and 27% among smaller stocks. Our model also provides a disagreement-based rationale for the idiosyncratic volatility puzzle, which is absorbed by our composite disagreement in empirical tests.
Keywords: disagreement, difference of opinion, analyst forecast dispersion, idiosyncratic volatility, idiosyncratic skewness, short interest, volume, financial distress, heterogenous agents, beliefs, expectations JEL: G11, G12, M40
JEL Classification: G11, G12, M40
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