Disagreement and Asset Prices

Bruce I. Carlin, Francis Longstaff and Kyle Matoba

No 18619, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: How do differences of opinion affect asset prices? Do investors earn a risk premium when disagreement arises in the market? Despite their fundamental importance, these questions are among the most controversial issues in finance. In this paper, we use a novel data set that allows us to directly measure the level of disagreement among Wall Street mortgage dealers about prepayment speeds. We examine how disagreement evolves over time and study its effects on expected returns, return volatility, and trading volume in the mortgage-backed security market. We find that increased disagreement is associated with higher expected returns, higher return volatility, and larger trading volume. These results imply that there is a positive risk premium for disagreement in asset prices. We also show that volatility in and of itself does not lead to higher trading volume. Rather, it is only when disagreement arises in the market that higher uncertainty is associated with more trading. Finally, we are able to distinguish empirically between two competing hypotheses regarding how information in markets gets incorporated into asset prices. We find that sophisticated investors appear to update their beliefs through a rational expectations mechanism when disagreement arises.

JEL-codes: G12 G14 (search for similar items in EconPapers)
Date: 2012-12
New Economics Papers: this item is included in nep-mst
Note: AP
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Published as Bruce I. Carlin & Francis A. Longstaff & Kyle Matoba, 2014. "Disagreement and asset prices," Journal of Financial Economics, vol 114(2), pages 226-238.

Downloads: (external link)
http://www.nber.org/papers/w18619.pdf (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:nbr:nberwo:18619

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w18619

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().