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

Panayiotis Andreou, Anastasios Kagkadis, Paulo Fraga Martins Maio, Dennis Philip

Research output: Contribution to journalArticleScientificpeer-review

Abstract

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.
Original languageEnglish
Peer-reviewed scientific journalCritical Finance Review
Volume10
Issue number1
Pages (from-to)65-81
ISSN2164-5744
DOIs
Publication statusPublished - 01.04.2021
MoE publication typeA1 Journal article - refereed

Keywords

  • 512 Business and Management
  • Dispersion in beliefs
  • Predictability of stock returns
  • Equity premium
  • Trading volume dispersion
  • Out-of-sample predictability
  • Economic significance

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