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Dispersion in options investors' versus analysts' expectations: predictive inference for stock returns

Andreou, P. and Kagkadis, A. and Maio, P. and Philip, D. (2021) 'Dispersion in options investors' versus analysts' expectations: predictive inference for stock returns.', Critical finance review., 10 (1). pp. 65-81.


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 insignicant 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.

Item Type:Article
Full text:(AM) Accepted Manuscript
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Date accepted:17 July 2019
Date deposited:19 August 2019
Date of first online publication:01 April 2021
Date first made open access:12 November 2021

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