Dispersion of beliefs, ambiguity, and the cross-section of stock returns

We examine whether ambiguity is priced in the cross-section of expected stock returns. Using the cross-sectional dispersion in real-time forecasts of real GDP growth as a measure for ambiguity, we find that high ambiguity beta stocks earn lower future returns relative to low ambiguity beta stocks. T...

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Bibliographic Details
Published inJournal of empirical finance Vol. 50; pp. 43 - 56
Main Authors Lee, Deok-Hyeon, Min, Byoung-Kyu, Kim, Tong Suk
Format Journal Article
LanguageEnglish
Published Elsevier B.V 01.01.2019
Subjects
Ambiguity
Cross-section of stock returns
Dispersion of beliefs
Dispersion of beliefs
G12
G14
Cross-section of stock returns
Ambiguity
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Summary:We examine whether ambiguity is priced in the cross-section of expected stock returns. Using the cross-sectional dispersion in real-time forecasts of real GDP growth as a measure for ambiguity, we find that high ambiguity beta stocks earn lower future returns relative to low ambiguity beta stocks. This negative predictive relation between the ambiguity beta and future returns is consistent with theory, which predicts the marginal utility of consumption to rise when ambiguity is high. We further show that the ambiguity premium remains significant after controlling for exposures to expected real GDP growth, VIX, and financial market dislocations index. •Ambiguity is priced in the cross-section of expected stock returns.•High ambiguity beta stocks earn lower future returns.•The ambiguity premium is distinct from the procyclicality premium.
ISSN:0927-5398
1879-1727
DOI:10.1016/j.jempfin.2019.01.001