DP4819 Dispersion of Opinion and Stock Returns

Author(s): William Goetzmann, Massimo Massa
Publication Date: December 2004
Keyword(s): asset prices, dispersion of opinion, volatility
JEL(s): D10, G10
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=4819

We use a panel of more than 100,000 investor accounts in US stocks over the period 1991-95 to construct an investor-based measure of dispersion of opinion, unlike the analyst based measure used in the literature. We use this measure to test two competing hypotheses: the sidelined investors hypothesis and the uncertainty/asymmetric information hypothesis. We find evidence that supports the sidelined-investors hypothesis. We show that the dispersion of opinion of the investors in a stock is positively related to the contemporaneous returns and trading volume of the stock and negatively related to its future returns. Moreover, dispersion of opinion aggregates across many stocks and generates factors that have a market-wide effect, affecting the stock equilibrium rate of return and providing additional explanatory power in a standard asset-pricing model. This supports the interpretation of dispersion of opinion as a risk factor. We also show that dispersion of opinion among retail investors Granger causes dispersion of opinion among analysts.