Market Belief Risk and the Cross-Section of Stock Returns

Rajna Gibson and Songtao Wang
Additional contact information
Rajna Gibson: University of Geneva, Ecole Polytechnique Fédérale de Lausanne, and Swiss Finance Institute
Songtao Wang: Shanghai Jiao Tong University

No 12-37, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: This paper studies the effect of market belief risk on the cross-section of stock returns. Using actual and analyst EPS forecast data, we construct the market belief as the cross-sectional average of individual beliefs for all sample stocks, with individual belief defined as the mean analyst EPS forecast minus the one derived from the Brown and Roze (1979) EPS model. We observe that a portfolio that is long in stocks with the highest sensitivities and short in stocks with the lowest sensitivities to innovations in market belief earns an average yearly return of 5.4%. This positive relationship between market belief risk and stock returns persists after accounting for traditional risk factors and is particularly strong for large-cap stocks. These findings are robust when considering alternative specifications of market belief risk. Finally, we find that stocks' exposure to market belief risk increases with their market beta, volatility, turnover rate, and their sale-to-asset ratio and decreases with their size, momentum, and analyst coverage.

Keywords: Analysts' EPS Forecasts; Heterogeneous Beliefs; Market Belief Risk; Cross-Section of Stock Returns (search for similar items in EconPapers)
JEL-codes: G11 G12 G23 (search for similar items in EconPapers)
Pages: 58 pages
Date: 2012-11
New Economics Papers: this item is included in nep-fmk
References: Add references at CitEc
Citations:

Downloads: (external link)
http://ssrn.com/abstract=2186429 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1237

Access Statistics for this paper

More papers in Swiss Finance Institute Research Paper Series from Swiss Finance Institute Contact information at EDIRC.
Bibliographic data for series maintained by Ridima Mittal ().