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Dispersion of beliefs, ambiguity, and the cross-section of stock returns

Deok-Hyeon Lee, Byoung-Kyu Min and Tong Suk Kim

Journal of Empirical Finance, 2019, vol. 50, issue C, 43-56

Abstract: We examine whether ambiguity is priced in the cross-section of expected stock returns. Using the cross-sectional dispersion in real-time forecasts of real GDP growth as a measure for ambiguity, we find that high ambiguity beta stocks earn lower future returns relative to low ambiguity beta stocks. This negative predictive relation between the ambiguity beta and future returns is consistent with theory, which predicts the marginal utility of consumption to rise when ambiguity is high. We further show that the ambiguity premium remains significant after controlling for exposures to expected real GDP growth, VIX, and financial market dislocations index.

Keywords: Ambiguity; Dispersion of beliefs; Cross-section of stock returns (search for similar items in EconPapers)
JEL-codes: G12 G14 (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1016/j.jempfin.2019.01.001

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Journal of Empirical Finance is currently edited by R. T. Baillie, F. C. Palm, Th. J. Vermaelen and C. C. P. Wolff

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