Divergence of Opinion, Arbitrage Costs and Stock Returns

摘要

We develop a new proxy for divergence of opinion to use in examining how this phenomenon affects cross-sectional asset returns for different stocks with different arbitrage costs. We generalize Tauchen and Pitts' (1983) Mixture of Distribution Hypothesis (MDH), which links asset volume and volatility in a way that derives a proxy for divergence of opinion among all individual investors. This new measure can more directly capture the information of divergence of opinion among all individual investors than other proxies, such as the dispersion in analyst's earnings forecasts and turnover. In our empirical asset pricing analysis, we incorporate the crucial role of divergence of opinion in determining crosssectional asset returns and establish that when divergence of opinion is high, stock prices tend to be biased upward, resulting in lower future returns. These effects are especially pronounced for stocks with higher arbitrage costs, such as idiosyn- cratic risks, short sale costs, and other transaction costs, which are more difficult and costly to short sell. Our results support Miller's (1977) view that, given short- sale constraints, observed prices overweight optimistic valuations. The predic- tions of recent theoretical work, such as Hong and Stein (2003), are valid only for stocks with lower arbitrage costs. Also, our results suggest that idiosyncratic risk, relative to other arbitrage cost measures, incrementally explains the effect of the divergence of opinion on stock returns.