Accepted author manuscript, 873 KB, PDF document
Research output: Contribution to Journal/Magazine › Journal article › peer-review
Research output: Contribution to Journal/Magazine › Journal article › peer-review
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TY - JOUR
T1 - Dispersion in options investors' versus analysts' expectations
T2 - Predictive inference for stock returns
AU - Andreou, Panayiotis C.
AU - Kagkadis, Anastasios
AU - Maio, Paulo
AU - Philip, Dennis
PY - 2021/4/1
Y1 - 2021/4/1
N2 - We create a market-wide measure of dispersion in options investors’ 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 analysts’ 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.
AB - We create a market-wide measure of dispersion in options investors’ 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 analysts’ 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.
KW - Dispersion in beliefs
KW - Predictability of stock returns
KW - Equity premium
KW - Trading volume dispersion
KW - Out-of-sample predictability
KW - Economic significance
U2 - 10.1561/104.00000091
DO - 10.1561/104.00000091
M3 - Journal article
VL - 10
SP - 65
EP - 81
JO - Critical Finance Review
JF - Critical Finance Review
SN - 2164-5760
IS - 1
ER -