Divergence Of Opinion And Stock Returns

Asset pricing model based on heterogeneous beliefs studies the asset pricingunder the assumption that investors have different expectations of asset returnprobability distribution. This paper selects adjusted turnover as a proxy for divergenceof opinion and covers2468stocks in A-share market from1998to2013. Portfolioanalysis and regression tests are employed to study the relationship betweendivergence of opinion and future stock returns in China.Our empirical results indicate that under short-sale constraints, heterogeneousbeliefs lead to overvaluation of stock price in the current period and lower stockreturns in the subsequent periods. And the return pattern is significant after controllingfor size effect, value effect, and momentum effect. The monthly return differencebetween lowest-and highest-dispersion groups is2.1%. There is still an unexplainedabnormal return after adjusted by Fama-French Model. This paper further introducescross-sectional regression and proves Miller’s divergence of opinion anomaly issignificantly established in China, which is even more common.Considering the special circumstances in China that short-sale mechanism wasfirst introduced in Mar.2010, this paper compares the first pilot short-selling stocksbefore and after the policy change and compares them with the rest of stocks to bettersee the role of short-sale limits in differences-of-opinion effect. The empirical resultsdemonstrate that the negative impacts of investor disagreement on returns of short-selling stock are significantly weakened after the relaxation of short-sale restrictions.Consequently, the promotion of short sale helps improve market pricing efficiency.