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Article

Analyst Forecast Dispersion and Market Return Predictability: Does Conditional Equity Premium Play a Role?

by
Shuang Liu
1,*,
Juan Yao
1 and
Stephen Satchell
2
1
The Discipline of Finance, The University of Sydney Business School, The University of Sydney, Sydney, NSW 2006, Australia
2
Trinity College, University of Cambridge, Cambridge CB2 1TQ, UK
*
Author to whom correspondence should be addressed.
J. Risk Financ. Manag. 2020, 13(5), 98; https://doi.org/10.3390/jrfm13050098
Submission received: 15 April 2020 / Revised: 11 May 2020 / Accepted: 12 May 2020 / Published: 16 May 2020
(This article belongs to the Special Issue Modern Portfolio Theory)
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Abstract

Prior studies found that analyst forecast dispersion predicts future market returns. Some prior studies attribute this predictability to the short-sale constraints in the market according to the overpricing theory. Using the U.S. data from 1981 to 2014, we find that the return predictive power of aggregate dispersion only exists prior to 2005. The investor sentiment index, as a proxy of short-sale constraints used by many studies, can only explain the dispersion effect prior to 2005. The investor sentiment index and other proxies such as institutional ownership and put options cannot explain the significant weakening of the dispersion effect after the global financial crisis. We argue that the dispersion-return relation is partly driven by the correlation between dispersion and conditional equity premium. Our evidence suggests that the short-sale constrained stocks do not experience a higher dispersion effect, which is contrary to what the overpricing theory predicts.
Keywords: analyst forecast dispersion; conditional equity premium; market variance; average idiosyncratic variance; investor sentiment analyst forecast dispersion; conditional equity premium; market variance; average idiosyncratic variance; investor sentiment

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MDPI and ACS Style

Liu, S.; Yao, J.; Satchell, S. Analyst Forecast Dispersion and Market Return Predictability: Does Conditional Equity Premium Play a Role? J. Risk Financ. Manag. 2020, 13, 98. https://doi.org/10.3390/jrfm13050098

AMA Style

Liu S, Yao J, Satchell S. Analyst Forecast Dispersion and Market Return Predictability: Does Conditional Equity Premium Play a Role? Journal of Risk and Financial Management. 2020; 13(5):98. https://doi.org/10.3390/jrfm13050098

Chicago/Turabian Style

Liu, Shuang, Juan Yao, and Stephen Satchell. 2020. "Analyst Forecast Dispersion and Market Return Predictability: Does Conditional Equity Premium Play a Role?" Journal of Risk and Financial Management 13, no. 5: 98. https://doi.org/10.3390/jrfm13050098

APA Style

Liu, S., Yao, J., & Satchell, S. (2020). Analyst Forecast Dispersion and Market Return Predictability: Does Conditional Equity Premium Play a Role? Journal of Risk and Financial Management, 13(5), 98. https://doi.org/10.3390/jrfm13050098

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