Dispersion of Opinion and Stock Returns

41 Pages Posted: 8 Apr 2005

See all articles by Massimo Massa

Massimo Massa

INSEAD - Finance

William N. Goetzmann

Yale School of Management - International Center for Finance; National Bureau of Economic Research (NBER)

Date Written: December 2004

Abstract

We use a panel of more than 100,000 investor accounts in US stocks over the period 1991-1995 to construct an investor-based measure of dispersion of opinion, unlike the analyst based measure used in the literature. We use this measure to test two competing hypotheses: the sidelined investors hypothesis and the uncertainty/asymmetric information hypothesis. We find evidence that supports the sidelined-investors hypothesis. We show that the dispersion of opinion of the investors in a stock is positively related to the contemporaneous returns and trading volume of the stock and negatively related to its future returns. Moreover, dispersion of opinion aggregates across many stocks and generates factors that have a market-wide effect, affecting the stock equilibrium rate of return and providing additional explanatory power in a standard asset-pricing model. This supports the interpretation of dispersion of opinion as a risk factor. We also show that dispersion of opinion among retail investors Granger causes dispersion of opinion among analysts.

Keywords: Dispersion of opinion, asset prices, volatility

JEL Classification: D10, G10

Suggested Citation

Massa, Massimo and Goetzmann, William N., Dispersion of Opinion and Stock Returns (December 2004). CEPR Discussion Paper No. 4819. Available at SSRN: https://ssrn.com/abstract=700671

Massimo Massa

INSEAD - Finance ( email )

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William N. Goetzmann (Contact Author)

Yale School of Management - International Center for Finance ( email )

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National Bureau of Economic Research (NBER)

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