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Durham University

Research & business

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Publication details for Professor Dennis Philip

Andreou, P. , Kagkadis, A., Maio, P. & Philip, D. (2020). Dispersion in options investors' versus analysts' expectations: Predictive inference for stock returns. Critical Finance Review

Author(s) from Durham


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 insigni cant 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.