Offsetting Disagreement and Security Prices

52 Pages Posted: 3 Feb 2014 Last revised: 10 Aug 2020

See all articles by Shiyang Huang

Shiyang Huang

The University of Hong Kong - Faculty of Business and Economics

Byoung-Hyoun Hwang

Nanyang Business School, Nanyang Technological University

Dong Lou

London School of Economics & Political Science (LSE); Centre for Economic Policy Research (CEPR)

Chengxi (Adam) Yin

University of International Business and Economics

Multiple version iconThere are 2 versions of this paper

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

Huang, Shiyang and Hwang, Byoung-Hyoun and Lou, Dong and Yin, Chengxi, Offsetting Disagreement and Security Prices (August 22, 2017). Available at SSRN: https://ssrn.com/abstract=2389730 or http://dx.doi.org/10.2139/ssrn.2389730

Shiyang Huang

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Byoung-Hyoun Hwang (Contact Author)

Nanyang Business School, Nanyang Technological University ( email )

Singapore, 639798
Singapore

Dong Lou

London School of Economics & Political Science (LSE) ( email )

Department of Finance
Houghton Street
London, WC2A 2AE
United Kingdom
+44 (0)207 1075360 (Phone)

HOME PAGE: http://personal.lse.ac.uk/loud/

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Chengxi Yin

University of International Business and Economics ( email )

Beijing
China

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