Two Trees with Heterogeneous Beliefs: Spillover Effect of Disagreement

47 Pages Posted: 11 Sep 2014 Last revised: 19 Nov 2017

See all articles by Bing Han

Bing Han

University of Toronto, Rotman School of Management

Lei Lu

Asper School of Business, University of Manitoba

Yi Zhou

San Francisco State University

Date Written: November 14, 2017

Abstract

In a model where investors disagree about the fundamentals of two stocks, the state price density depends on investor disagreements for both stocks, especially the larger stock. This implies that disagreement among investors in a large firm has a spillover effect on the pricing of other stocks owned by these investors. The pricing effects of investor disagreements crucially depend on the average belief biases. Empirical findings support the novel model prediction of a disagreement spillover effect and help reconcile some mixed evidence in the literature.

Keywords: Heterogeneous beliefs, disagreements; spillover effect; peer effect; expected return; volatility

JEL Classification: D53, G12

Suggested Citation

Han, Bing and Lu, Lei and Zhou, Yi, Two Trees with Heterogeneous Beliefs: Spillover Effect of Disagreement (November 14, 2017). Rotman School of Management Working Paper No. 2493831, Available at SSRN: https://ssrn.com/abstract=2493831 or http://dx.doi.org/10.2139/ssrn.2493831

Bing Han (Contact Author)

University of Toronto, Rotman School of Management ( email )

Toronto, Ontario M5S 3E6
Canada
4169460732 (Phone)

Lei Lu

Asper School of Business, University of Manitoba ( email )

181 Freedman Crescent
Winnipeg, Manitoba R3T 5V4
Canada

Yi Zhou

San Francisco State University ( email )

College of Business
1600 Holloway Avenue
San Francisco, CA 94132
United States
(415) 338-2661 (Phone)
(415) 338-0596 (Fax)

HOME PAGE: http://cob.sfsu.edu/directory/yi-zhou

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