Top-down or Bottom-up: Commonality in Disagreement and Asset Pricing
نویسنده
چکیده
This paper presents a model to demonstrate that, when di¤erences-of-opinion over individual securities have a common component, the valuation of the aggregate market can be higher than its fundamental, even if all investors agree on the market fundamental. Using analyst forecast dispersion to measure disagreement, I nd empirical evidence that individual stock disagreements co-move and the common component mean-reverts, the common disagreement has substantial explanatory power for the time-series variation of equity premium, and the common disagreement correlates with discount-rate news rather than cash-ow news and has explanatory power for the time-series variation of value premium. I thank Douglas Diamond, Larry Glosten, Robert Hodrick, Paul Tetlock, Rossen Valkanov, Wei Xiong, and seminar participants at CUNY Graduate Center for helpful comments. y421 Uris Hall, 3022 Broadway, New York, NY 10027. Phone: (212) 854-9140. Email: [email protected].
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