Analyst Forecast Dispersion and Aggregate Stock Returns

This paper shows a positive relation between analyst forecast dispersion and future aggregate stock returns, significant and robust. The innovations in forecast dispersions are negatively associated with contemporaneous aggregate returns and changes in discount rates. Decomposing forecast dispersion into “uncertainty” and “information asymmetry” components, I find that the “uncertainty” component turns positive at the aggregate level, and both components drive the positive prediction relation. These findings suggest that aggregate dispersion covaries with discount rates and dispersions can be interpreted as default risk, or divergence in opinions, rather than idiosyncratic risk. They are also consistent with the argument that corporate selective disclosure is a reason for the dispersion-return relation. JEL Classification: E17, G17, G33