Disagreement of Disagreement

67 Pages Posted: 28 Nov 2023 Last revised: 5 Feb 2024

See all articles by Christian L. Goulding

Christian L. Goulding

Auburn University - Harbert College of Business

Campbell R. Harvey

Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER)

Hrvoje Kurtović

University of Lausanne - Faculty of Business and Economics (HEC Lausanne)

Date Written: February 5, 2024

Abstract

We show that there is remarkably low correlation (only 0.09) among different proposed proxies for investor disagreement, such as analysts’ forecast dispersion, short trading volume, and idiosyncratic volatility. This disagreement of the disagreement proxies makes it challenging to assess the impact on prices given results will depend on the choice of proxy. We develop a new unified framework to establish expected relationships among disparate measures of disagreement. Our model reveals a novel nonlinear composite measure, which is more predictive of returns than extant measures. A decile spread portfolio sorted on our composite measure generates a value-weighted alpha of 15.2% per year. Our model also provides a disagreement-based rationale for the predictive strength of idiosyncratic volatility, which is absorbed by our composite disagreement in empirical tests.


Updates from November 28, 2023 version: (1) We add a unitless short interest-based disagreement measure; (2) We now use unitless measures for all composite disagreement inputs (including unadjusted IVOL and forecast dispersion DISP) so that our composite score is also unitless and therefore more suitable for cross sectional comparisons.



Future versions: (1) Independently replicate iSKEW measure; (2) Update data.

Keywords: Disagreement, difference of opinion, analyst forecast dispersion, idiosyncratic volatility, idiosyncratic skewness, trading volume, financial distress, heterogenous agents, behavioral finance, beliefs, expectations

JEL Classification: G11, G12, M40

Suggested Citation

Goulding, Christian L. and Harvey, Campbell R. and Kurtović, Hrvoje, Disagreement of Disagreement (February 5, 2024). Available at SSRN: https://ssrn.com/abstract=4647471 or http://dx.doi.org/10.2139/ssrn.4647471

Christian L. Goulding

Auburn University - Harbert College of Business ( email )

Auburn, AL 36849
United States

Campbell R. Harvey (Contact Author)

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7768 (Phone)

HOME PAGE: http://www.duke.edu/~charvey

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Hrvoje Kurtović

University of Lausanne - Faculty of Business and Economics (HEC Lausanne) ( email )

Switzerland

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