Offsetting disagreement and security prices

Shiyang Huang, Byoung-Hyoun Hwang, Dong Lou and Chengxi Yin

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: We propose that investor beliefs frequently “cross” in the sense that an investor may like company A but dislike company B, whereas another investor may like company B but dislike company A. Such belief-crossing makes it almost impossible to construct a portfolio that is composed solely of every investor’s most favored companies. This causes the level of excitement for portfolios to be generally lower than the levels of excitement that individual companies generate among their most fervent supporters. Coupled with short-sale constraints, wherein prices are set by the most optimistic investors, this causes portfolios to trade at discounts. Utilizing several settings whereby the value of a portfolio and the values of the underlying components can be evaluated separately (e.g., closed-end funds), we present evidence supporting our proposition that, in financial markets, the “whole” is often less than the “sum of its parts.”

Keywords: investor disagreement; belief-crossing; portfolio discounts (search for similar items in EconPapers)
JEL-codes: F3 G3 J50 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2020-08-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Published in Management Science, 1, August, 2020, 66(8), pp. 3444 - 3465. ISSN: 0025-1909

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