Expected Return or Mispricing? Evidence from the Term Structure of Option-implied Disagreement

Abstract

We study the term structure of option-implied investor disagreement about future market returns. We document two key patterns: (1) in the cross-section, the term structure of disagreement is generally downward sloping, and (2) in the time series, disagreement does not uniformly decline across all horizons as new information arrives. While aggregate disagreement shows limited predictive power for future market returns, the term structure factors-particularly level and curvature-significantly predict returns from one to 24 months. Moreover, these factors predict returns through distinct channels: the level factor serves as a predictor of mispricing, while the curvature factor captures risk-based variations in returns. Our findings shed light on the dynamics of investor disagreement across varying horizons.

Keywords: G12, G13, G14 Investor disagreement, term structure, expected returns, mispricing