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Dispersion in options investors' versus analysts' expectations: Predictive inference for stock returns

Research output: Contribution to Journal/Magazine › Journal article › peer-review

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Dispersion in options investors' versus analysts' expectations: Predictive inference for stock returns. / Andreou, Panayiotis C.; Kagkadis, Anastasios; Maio, Paulo et al.
In: Critical Finance Review, Vol. 10, No. 1, 01.04.2021, p. 65-81.

Research output: Contribution to Journal/Magazine › Journal article › peer-review

Harvard

Andreou, PC, Kagkadis, A, Maio, P & Philip, D 2021, 'Dispersion in options investors' versus analysts' expectations: Predictive inference for stock returns', Critical Finance Review, vol. 10, no. 1, pp. 65-81. https://doi.org/10.1561/104.00000091, https://doi.org/https://www.nowpublishers.com/article/Details/CFR-0091

APA

Andreou, P. C., Kagkadis, A., Maio, P., & Philip, D. (2021). Dispersion in options investors' versus analysts' expectations: Predictive inference for stock returns. Critical Finance Review, 10(1), 65-81. https://doi.org/10.1561/104.00000091, https://doi.org/https://www.nowpublishers.com/article/Details/CFR-0091

Vancouver

Andreou PC, Kagkadis A, Maio P, Philip D. Dispersion in options investors' versus analysts' expectations: Predictive inference for stock returns. Critical Finance Review. 2021 Apr 1;10(1):65-81. doi: 10.1561/104.00000091, https://www.nowpublishers.com/article/Details/CFR-0091

Author

Andreou, Panayiotis C. ; Kagkadis, Anastasios ; Maio, Paulo et al. / Dispersion in options investors' versus analysts' expectations : Predictive inference for stock returns. In: Critical Finance Review. 2021 ; Vol. 10, No. 1. pp. 65-81.

Bibtex

@article{744360b006b44e969a7126ed249d8de8,
title = "Dispersion in options investors' versus analysts' expectations: Predictive inference for stock returns",
abstract = "We create a market-wide measure of dispersion in options investors{\textquoteright} 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{\textquoteright} 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",
author = "Andreou, {Panayiotis C.} and Anastasios Kagkadis and Paulo Maio and Dennis Philip",
year = "2021",
month = apr,
day = "1",
doi = "10.1561/104.00000091",
language = "English",
volume = "10",
pages = "65--81",
journal = "Critical Finance Review",
issn = "2164-5760",
publisher = "Now Publishers",
number = "1",

}

RIS

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 -