IDEAS home Printed from https://ideas.repec.org/a/eee/jfinec/v114y2014i2p226-238.html
   My bibliography  Save this article

Disagreement and asset prices

Author

Listed:
  • Carlin, Bruce I.
  • Longstaff, Francis A.
  • Matoba, Kyle

Abstract

How do differences of opinion affect asset prices? Do investors earn a risk premium when disagreement arises in the market? Despite their fundamental importance, these questions are among the most controversial issues in finance. In this paper, we use a novel data set that allows us to directly measure the level of disagreement among Wall Street mortgage dealers about prepayment speeds. We examine how disagreement evolves over time and study its effects on expected returns, return volatility, and trading volume in the mortgage-backed security market. We find that increased disagreement is associated with higher expected returns, higher return volatility, and larger trading volume. These results imply that there is a positive risk premium for disagreement in asset prices. We also show that volatility in and of itself does not lead to higher trading volume. Instead, only when disagreement arises in the market is higher uncertainty associated with more trading. Finally, we are able to distinguish empirically between two competing hypotheses regarding how information in markets gets incorporated into asset prices. We find that sophisticated investors appear to update their beliefs through a rational expectations mechanism when disagreement arises.

Suggested Citation

  • Carlin, Bruce I. & Longstaff, Francis A. & Matoba, Kyle, 2014. "Disagreement and asset prices," Journal of Financial Economics, Elsevier, vol. 114(2), pages 226-238.
    • Handle: RePEc:eee:jfinec:v:114:y:2014:i:2:p:226-238
    DOI: 10.1016/j.jfineco.2014.06.007
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0304405X14001342
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jfineco.2014.06.007?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Karl B. Diether & Christopher J. Malloy & Anna Scherbina, 2002. "Differences of Opinion and the Cross Section of Stock Returns," Journal of Finance, American Finance Association, vol. 57(5), pages 2113-2141, October.
    2. Kandel, Eugene & Pearson, Neil D, 1995. "Differential Interpretation of Public Signals and Trade in Speculative Markets," Journal of Political Economy, University of Chicago Press, vol. 103(4), pages 831-872, August.
    3. Alexander David, 2008. "Heterogeneous Beliefs, Speculation, and the Equity Premium," Journal of Finance, American Finance Association, vol. 63(1), pages 41-83, February.
    4. Fama, Eugene F. & French, Kenneth R., 2007. "Disagreement, tastes, and asset prices," Journal of Financial Economics, Elsevier, vol. 83(3), pages 667-689, March.
    5. James Vickery & Joshua Wright, 2013. "TBA trading and liquidity in the agency MBS market," Economic Policy Review, Federal Reserve Bank of New York, vol. 19(May), pages 1-18.
    6. Geanakoplos, John D. & Polemarchakis, Heraklis M., 1982. "We can't disagree forever," Journal of Economic Theory, Elsevier, vol. 28(1), pages 192-200, October.
    7. Andrew B. Abel, "undated". "Asset Prices Under Heterogenous Beliefs: Implications for the Equity Premium," Rodney L. White Center for Financial Research Working Papers 09-89, Wharton School Rodney L. White Center for Financial Research.
    8. Boehme, Rodney D. & Danielsen, Bartley R. & Kumar, Praveen & Sorescu, Sorin M., 2009. "Idiosyncratic risk and the cross-section of stock returns: Merton (1987) meets Miller (1977)," Journal of Financial Markets, Elsevier, vol. 12(3), pages 438-468, August.
    9. Cheolbeom Park, 2005. "Stock Return Predictability and the Dispersion in Earnings Forecasts," The Journal of Business, University of Chicago Press, vol. 78(6), pages 2351-2376, November.
    10. Sara B. Moeller & Frederik P. Schlingemann & René M. Stulz, 2007. "How Do Diversity of Opinion and Information Asymmetry Affect Acquirer Returns?," The Review of Financial Studies, Society for Financial Studies, vol. 20(6), pages 2047-2078, November.
    11. Snehal Banerjee & Ilan Kremer, 2010. "Disagreement and Learning: Dynamic Patterns of Trade," Journal of Finance, American Finance Association, vol. 65(4), pages 1269-1302, August.
    12. Basak, Suleyman, 2005. "Asset pricing with heterogeneous beliefs," Journal of Banking & Finance, Elsevier, vol. 29(11), pages 2849-2881, November.
    13. Miller, Edward M, 1977. "Risk, Uncertainty, and Divergence of Opinion," Journal of Finance, American Finance Association, vol. 32(4), pages 1151-1168, September.
    14. Hui Chen & Scott Joslin & Ngoc-Khanh Tran, 2010. "Affine Disagreement and Asset Pricing," American Economic Review, American Economic Association, vol. 100(2), pages 522-526, May.
    15. Varian, Hal R, 1985. "Divergence of Opinion in Complete Markets: A Note," Journal of Finance, American Finance Association, vol. 40(1), pages 309-317, March.
    16. Harris, Milton & Raviv, Artur, 1993. "Differences of Opinion Make a Horse Race," The Review of Financial Studies, Society for Financial Studies, vol. 6(3), pages 473-506.
    17. Avramov, Doron & Chordia, Tarun & Jostova, Gergana & Philipov, Alexander, 2009. "Dispersion in analysts' earnings forecasts and credit rating," Journal of Financial Economics, Elsevier, vol. 91(1), pages 83-101, January.
    18. Snehal Banerjee, 2011. "Learning from Prices and the Dispersion in Beliefs," The Review of Financial Studies, Society for Financial Studies, vol. 24(9), pages 3025-3068.
    19. Shalen, Catherine T, 1993. "Volume, Volatility, and the Dispersion of Beliefs," The Review of Financial Studies, Society for Financial Studies, vol. 6(2), pages 405-434.
    20. Chen, Joseph & Hong, Harrison & Stein, Jeremy C., 2002. "Breadth of ownership and stock returns," Journal of Financial Economics, Elsevier, vol. 66(2-3), pages 171-205.
    21. Daron Acemoglu & Victor Chernozhukov & Muhamet Yildiz, 2006. "Learning and Disagreement in an Uncertain World," NBER Working Papers 12648, National Bureau of Economic Research, Inc.
    22. Yu, Jialin, 2011. "Disagreement and return predictability of stock portfolios," Journal of Financial Economics, Elsevier, vol. 99(1), pages 162-183, January.
    23. Sris Chatterjee & Kose John & An Yan, 2012. "Takeovers and Divergence of Investor Opinion," The Review of Financial Studies, Society for Financial Studies, vol. 25(1), pages 227-277.
    24. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
    25. Zapatero, Fernando, 1998. "Effects of financial innovations on market volatility when beliefs are heterogeneous," Journal of Economic Dynamics and Control, Elsevier, vol. 22(4), pages 597-626, April.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Bruce I. Carlin & Francis A. Longstaff & Kyle Matoba, 2012. "Disagreement and Asset Prices," NBER Working Papers 18619, National Bureau of Economic Research, Inc.
    2. Adem Atmaz & Suleyman Basak, 2018. "Belief Dispersion in the Stock Market," Journal of Finance, American Finance Association, vol. 73(3), pages 1225-1279, June.
    3. Jia, Yun & Yang, Chunpeng, 2017. "Disagreement and the risk-return relation," Economic Modelling, Elsevier, vol. 64(C), pages 97-104.
    4. Hu, Yingyi & Zhao, Tiao & Zhang, Lin, 2020. "Noise trading, institutional trading, and opinion divergence: Evidence on intraday data in the Chinese stock market," International Review of Economics & Finance, Elsevier, vol. 68(C), pages 74-89.
    5. Hillert, Alexander & Jacobs, Heiko & Müller, Sebastian, 2018. "Journalist disagreement," Journal of Financial Markets, Elsevier, vol. 41(C), pages 57-76.
    6. Al-Nasseri, Alya & Menla Ali, Faek, 2018. "What does investors' online divergence of opinion tell us about stock returns and trading volume?," Journal of Business Research, Elsevier, vol. 86(C), pages 166-178.
    7. Gao, George P. & Lu, Xiaomeng & Song, Zhaogang & Yan, Hongjun, 2019. "Disagreement beta," Journal of Monetary Economics, Elsevier, vol. 107(C), pages 96-113.
    8. Wei Xiong, 2013. "Bubbles, Crises, and Heterogeneous Beliefs," NBER Working Papers 18905, National Bureau of Economic Research, Inc.
    9. Luo, Di & Farag, Hisham, 2024. "ESG and aggregate disagreement," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 92(C).
    10. Zhiqi Cao & Wenfeng Wu, 2023. "Difference of opinion among investors versus analysts," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(2), pages 2347-2381, June.
    11. Jeffrey Hobbs & Hei Wai Lee & Vivek Singh, 2017. "New evidence on the effect of belief heterogeneity on stock returns," Review of Quantitative Finance and Accounting, Springer, vol. 48(2), pages 289-309, February.
    12. Hirota, Shinichi, 2023. "Money supply, opinion dispersion, and stock prices," Journal of Economic Behavior & Organization, Elsevier, vol. 212(C), pages 1286-1310.
    13. Caglayan, Mustafa & Pham, Tho & Talavera, Oleksandr & Xiong, Xiong, 2020. "Asset mispricing in peer-to-peer loan secondary markets," Journal of Corporate Finance, Elsevier, vol. 65(C).
    14. ter Ellen, Saskia & Verschoor, Willem F.C. & Zwinkels, Remco C.J., 2019. "Agreeing on disagreement: Heterogeneity or uncertainty?," Journal of Financial Markets, Elsevier, vol. 44(C), pages 17-30.
    15. Chen, Lin & Qin, Lu & Zhu, Hongquan, 2015. "Opinion divergence, unexpected trading volume and stock returns: Evidence from China," International Review of Economics & Finance, Elsevier, vol. 36(C), pages 119-127.
    16. Guo, Hui & Qiu, Buhui, 2014. "Options-implied variance and future stock returns," Journal of Banking & Finance, Elsevier, vol. 44(C), pages 93-113.
    17. Akbas, Ferhat & Boehmer, Ekkehart & Jiang, Chao & Koch, Paul D., 2022. "Overnight returns, daytime reversals, and future stock returns," Journal of Financial Economics, Elsevier, vol. 145(3), pages 850-875.
    18. Wei Xiong & Hongjun Yan, 2010. "Heterogeneous Expectations and Bond Markets," The Review of Financial Studies, Society for Financial Studies, vol. 23(4), pages 1433-1466, April.
    19. Yen‐Cheng Chang & Pei‐Jie Hsiao & Alexander Ljungqvist & Kevin Tseng, 2022. "Testing Disagreement Models," Journal of Finance, American Finance Association, vol. 77(4), pages 2239-2285, August.
    20. Kim, Jun Sik & Ryu, Doojin & Seo, Sung Won, 2014. "Investor sentiment and return predictability of disagreement," Journal of Banking & Finance, Elsevier, vol. 42(C), pages 166-178.

    More about this item

    Keywords

    Disagreement; Asset prices; Return volatility; Trading volume;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jfinec:v:114:y:2014:i:2:p:226-238. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/505576 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.