Publication Type

Journal Article

Version

submittedVersion

Publication Date

7-2021

Abstract

Disagreement measures are known to predict cross-sectional stock returns but fail to predict market returns. This paper proposes a partial least squares disagreement index by aggregating information across individual disagreement measures and shows that this index significantly predicts market returns both in- and out-of-sample. Consistent with the theory in Atmaz and Basak (2018), the disagreement index asymmetrically predicts market returns with greater power in high-sentiment periods, is positively associated with investor expectations of market returns, predicts market returns through a cash flow channel, and can explain the positive volume-volatility relationship.

Keywords

Disagreement, Market risk premium, Return predictability, Information aggregation, PLS, Machine learning

Discipline

Finance and Financial Management | Portfolio and Security Analysis

Research Areas

Finance

Publication

Journal of Financial Economics

Volume

141

Issue

1

First Page

83

Last Page

101

ISSN

0304-405X

Identifier

10.1016/j.jfineco.2021.02.006

Publisher

Elsevier

Embargo Period

4-20-2021

Copyright Owner and License

Authors

Additional URL

https://doi.org/10.1016/j.jfineco.2021.02.006

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