Offsetting Disagreement and Security Prices
52 Pages Posted: 3 Feb 2014 Last revised: 10 Aug 2020
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Offsetting Disagreement and Security Prices
Offsetting Disagreement and Security Prices
Date Written: August 22, 2017
Abstract
We propose that investor beliefs frequently “cross” in the sense that an investor may like company A, but dislike company B, while another investor may like company B, but dislike company A. Belief-crossing makes it almost impossible to construct a portfolio that is comprised solely of every investor’s most favorite companies. This causes the level of excitement for portfolios to be generally less than the levels of excitement that individual companies receive from their most fervent supporters. Coupled with short-sale constraints, wherein prices are set by the most optimistic investors, this causes portfolios to trade at discounts. Utilizing various settings where the value of the portfolio and the values of the underlying components can be separately evaluated (e.g., closed-end funds), we present evidence supporting our proposition that, in financial markets, the “whole” is often less than the “sum of its parts.”
Keywords: Investor Disagreement, Belief Crossing, Portfolio Discounts
JEL Classification: G11, G12, G14, G20
Suggested Citation: Suggested Citation