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Disagreement and the risk-return relation

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  • Jia, Yun
  • Yang, Chunpeng

Abstract

Disagreement is an important behavioral factor in financial market, and this paper investigates the impact of disagreement on the risk-return relation. We construct disagreement of crowded trades (DCT) index to measure disagreement, and discover that DCT has a significant impact on the risk-return relation. Furthermore, DCT change has a time-varying effect on the risk-return relation. When DCT change is negative, the risk-return relation is significant and negative; when DCT change is positive, the risk-return relation is significantly positive. When we use different conditional variance models and different market portfolios, such results are still robust. Moreover, our empirical results have important practical implications for asset allocation decisions.

Suggested Citation

  • Jia, Yun & Yang, Chunpeng, 2017. "Disagreement and the risk-return relation," Economic Modelling, Elsevier, vol. 64(C), pages 97-104.
    • Handle: RePEc:eee:ecmode:v:64:y:2017:i:c:p:97-104
    DOI: 10.1016/j.econmod.2017.03.021
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    Cited by:

    1. Marc van Kralingen & Diego Garlaschelli & Karolina Scholtus & Iman van Lelyveld, 2020. "Crowded trades, market clustering, and price instability," Tinbergen Institute Discussion Papers 20-007/II, Tinbergen Institute.
    2. Suzanne G. M. Fifield & David G. McMillan & Fiona J. McMillan, 2020. "Is there a risk and return relation?," The European Journal of Finance, Taylor & Francis Journals, vol. 26(11), pages 1075-1101, July.
    3. Liyun Zhou & Chunpeng Yang, 2020. "Investor sentiment, investor crowded-trade behavior, and limited arbitrage in the cross section of stock returns," Empirical Economics, Springer, vol. 59(1), pages 437-460, July.
    4. Liyun Zhou & Chunpeng Yang, 2019. "Differences in the effects of seller-initiated versus buyer-initiated crowded trades in stock markets," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 14(4), pages 859-890, December.
    5. Tan, Zhengxun & Xiao, Binuo & Huang, Yilong & Zhou, Li, 2021. "Value at risk and return in Chinese and the US stock markets: Double long memory and fractional cointegration," The North American Journal of Economics and Finance, Elsevier, vol. 56(C).

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    More about this item

    Keywords

    Disagreement; Risk-return relation; Time-varying effect; Crowded trades; Volatility;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets

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