Commonality in Disagreement and Asset Pricing
نویسنده
چکیده
This paper presents a dynamic 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, and the common disagreement drives discount rate news. 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 Andrew Ang, Douglas Diamond, Larry Glosten, Robert Hodrick, Harrison Hong (discussant), Paul Tetlock, Rossen Valkanov, Wei Xiong, Kathy Yuan (discussant) and seminar participants at the 18th Annual Conference on Financial Economics and Accounting, Columbia Business School nance lunch workshop, CUNY Baruch College, CUNY Graduate Center, and NYU Stern Five-Star Conference on Research in Finance for helpful comments. y421 Uris Hall, 3022 Broadway, New York, NY 10027. Phone: (212) 854-9140. Email: [email protected].
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Top-down or Bottom-up: Commonality in Disagreement and Asset Pricing
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 comm...
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