Dispersion in Options Investorsâ€™ Versus Analystsâ€™ Expectations: Predictive Inference for Stock Returns
Panayiotis C. Andreou,
Paulo Maio and
Critical Finance Review, 2021, vol. 10, issue 1, 65-81
We create a market-wide measure of dispersion in options investorsâ€™ expectations by aggregating across all stocks the dispersion in trading volume across moneynesses (DISP). DISP exhibits strong negative predictive power for future market returns and its information content is not subsumed by several alternative equity premium predictors. Consistent with the implications of theoretical models that link dispersion to overpricing, the predictive power of DISP is particularly pronounced in relatively optimistic periods. Although an aggregate analystsâ€™ forecasts dispersion (AFD) measure also performs well in optimistic periods, it delivers insignificant overall predictability. This is because in the aftermath of the 2008 financial crisis, AFD was heavily driven by pessimistic forecasts and hence its increase did not reflect a true overpricing. As a result, AFD does not appear to be a robust equity premium predictor in recent years.
Keywords: Dispersion in beliefs; Predictability of stock returns; Equity premium; Trading volume dispersion; Out-of-sample predictability; Economic significance (search for similar items in EconPapers)
JEL-codes: G10 G11 G12 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:now:jnlcfr:104.00000091
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