Dispersion in options investors' versus analysts' expectations: Predictive inference for stock returns

Andreou, P.; Kagkadis, A.; Maio, P.; Philip, D.

Abstract

We create a market-wide measure of dispersion in options investors' expectations by aggregating across all stocks the dispersion in trading volume across moneynesses (DISP). DISP exhibits strong negative predictive power for future market returns and its information content is not subsumed by several alternative equity premium predictors. Consistent with the implications of theoretical models that link dispersion to overpricing, the predictive power of DISP is par- ticularly pronounced in relatively optimistic periods. Although an aggregate analysts' forecasts dispersion (AFD) measure also performs well in optimistic periods, it delivers insignicant over- all predictability. This is because in the aftermath of the 2008 nancial crisis, AFD was heavily driven by pessimistic forecasts and hence its increase did not re ect a true overpricing. As a result, AFD does not appear to be a robust equity premium predictor in recent years.

Citation

Andreou, P., Kagkadis, A., Maio, P., & Philip, D. (2021). Dispersion in options investors' versus analysts' expectations: Predictive inference for stock returns. Critical finance review, 10(1), 65-81. https://doi.org/10.1561/104.00000091

• Journal Article Type: Article
• Acceptance Date: Jul 17, 2019
• Online Publication Date: Apr 1, 2021
• Publication Date: 2021
• Deposit Date: Jul 30, 2019
• Publicly Available Date: Aug 19, 2019
• Journal: Critical finance review
• Print ISSN: 2164-5744
• Electronic ISSN: 2164-5760
• Publisher: Now Publishers
• Peer Reviewed: Peer Reviewed
• Volume: 10
• Issue: 1
• Pages: 65-81
• DOI: https://doi.org/10.1561/104.00000091
• Public URL: https://durham-repository.worktribe.com/output/1291439