The Interaction of Skewness and Analysts' Forecast Dispersion in Asset Pricing
57 Pages Posted: 6 Jan 2017
Date Written: January 3, 2017
Abstract
I develop a new asset pricing theory that bridges two seemingly unrelated pricing effects from separate literatures: (1) the negative relationship between ex-ante return skewness and expected returns and (2) the negative relationship between dispersion in financial analysts' earnings forecasts and expected returns. I show that both effects arise intrinsically from market clearing of stochastic demand in a standard noisy rational expectations economy that incorporates skewed assets followed by financial analysts. Positive correlation between forecast dispersion and investor heterogeneity arises endogenously. The theory generates several novel testable predictions regarding the interaction of ex-ante skewness and forecast dispersion on asset prices.
Keywords: ex-ante skewness, analyst forecast dispersion, investor belief heterogeneity, rational expectations, microstructure influences in asset pricing
JEL Classification: G12, D53, D82
Suggested Citation: Suggested Citation