Critical Finance Review > Vol 10 > Issue 1

Dispersion in Options Investors’ Versus Analysts’ Expectations: Predictive Inference for Stock Returns

Panayiotis C. Andreou, Cyprus University of Technology, Cyprus and Durham University Business School, UK, panayiotis.andreou@cut.ac.cy , Anastasios Kagkadis, Lancaster University Management School, UK, a.kagkadis@lancaster.ac.uk , Paulo Maio, Hanken School of Economics, Finland, paulo.maio@hanken.fi , Dennis Philip, Durham University Business School, UK, dennis.philip@durham.ac.uk
 
Suggested Citation
Panayiotis C. Andreou, Anastasios Kagkadis, Paulo Maio and Dennis Philip (2021), "Dispersion in Options Investors’ Versus Analysts’ Expectations: Predictive Inference for Stock Returns", Critical Finance Review: Vol. 10: No. 1, pp 65-81. http://dx.doi.org/10.1561/104.00000091

Publication Date: 01 Apr 2021
© 2021 Panayiotis C. Andreou, Anastasios Kagkadis, Paulo Maio and Dennis Philip
 
Subjects
 
Keywords
G10G11G12
Dispersion in beliefsPredictability of stock returnsEquity premiumTrading volume dispersionOut-of-sample predictabilityEconomic significance
 

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In this article:
1. Introduction 
2. Data and Variables 
3. Empirical Results 
4. Conclusion 
Appendix A: Description of Variables 
References 

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 particularly pronounced in relatively optimistic periods. Although an aggregate analysts’ forecasts dispersion (AFD) measure also performs well in optimistic periods, it delivers insignificant overall predictability. This is because in the aftermath of the 2008 financial crisis, AFD was heavily driven by pessimistic forecasts and hence its increase did not reflect a true overpricing. As a result, AFD does not appear to be a robust equity premium predictor in recent years.

DOI:10.1561/104.00000091