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Two Trees with Heterogeneous Beliefs: Spillover Effect of Disagreement

Published online by Cambridge University Press:  08 October 2018

Bing Han ,
Lei Lu  and
Yi Zhou
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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.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 54 , Issue 4 , August 2019 , pp. 1791 - 1819
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2018 

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Footnotes

1

We thank an anonymous referee, Hendrik Bessembinder and Stephen Brown (the editors), Toshiki Honda, Hagen Kim, Wei Xiong, and seminar participants at Shanghai University of Finance and Economics, Southwestern University of Finance and Economics, the 2014 China International Conference in Finance, and the 2015 Annual Meeting of the Asian Finance Association for helpful discussions and comments. All remaining errors are our own.

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