Disagreement, Salience, and Asset-Pricing Anomalies(1/3)

Project Details


Disagreement, or divergence of opinion, plays an important role in finance, because it helps explain various puzzling phenomena unexplained by traditional asset-pricing models, especially those related to trading volume (Lo and Wang, 2000). As of the end of 2019, a search of Google Scholars using the words of “differences of opinion” or “divergence of opinion” yields a total number of 3,000,000 items, among which the seminal paper of Miller (1977) alone earns almost 4000 citations. As Barberis (2018) points out, Miller’s paper was neglected for almost two decades until the late 1990s, because his “imperfect” view contradicted the then mainstream efficient- market view. Miller (1977) shows that differences of opinion, in conjunction with the presence of short-sale restrictions, cause overpricing, which in turn is followed by a lower subsequent return. Miller’s theory has been applied to explain return patterns related to price momentum, market crashes, and even bubbles (see, e.g., Hong and Stein, 2007). However, as it is a static one, it cannot directly speak of trading volume, because it is the “crossing” of opinions among investors that leads to trade, rather then the divergence of opinion itself.Miller’s model has the strength of being simple, because it is based on a partial analysis, rather than an equilibrium analysis, so that it does not rely on strict assump- tions on preferences or behavior. The simplicity has its weakness, because then it is unlikely to provide more specific predictions or explanations for several documented phenomena or anomalies. Hence, the purpose of this 3-year project is threefold:1. As Miller’s original model is descriptive in nature, we provide a theoretical model, so that the relationship among many variables of interest (e.g., short- sale restrictions, short-interest, and disagreement) becomes clear. Based upon the model, some testable hypotheses can be developed and tested.2. We unify MIller’s model and the salience model proposed by Bordalo, Gennaioli,and Shleifer (2012, 2013), so that investors’ misreactions to varying degrees of payoffs or returns generate disagreement, which in turn causing overpricing and underpricing to different assets. We expect the new proposed theory can explain the famous “short-term momentum and long-term reversal” puzzle. The theory also helps explain several lottery-like anomalies such as the maxing-out effect documented by Bali, Cakici, and Whitelaw (2011).3. By augmenting Miller’s (1977) differences-of-opinion theory with investor het- erogeneity, we show that mispricing due to noise traders’ overreaction to salient news will exhibit patterns related to turnover. Our theory is related to two strands of literature: Miller’s disagreement model and the lottery-like features or preferences as proposed by Kumar (2009). The contribution of this project is to provide theoretical and empirical support for turnover-related patterns on lottery-related anomalies. We propose several testable hypotheses to examine whether lottery-related anomalies really exhibit patterns related to turnover. The empirical analysis will be mostly based on the U.S. data, and hopefully extended to international data.
Effective start/end date1/08/2031/07/21

UN Sustainable Development Goals

In 2015, UN member states agreed to 17 global Sustainable Development Goals (SDGs) to end poverty, protect the planet and ensure prosperity for all. This project contributes towards the following SDG(s):

  • SDG 5 - Gender Equality
  • SDG 13 - Climate Action
  • SDG 17 - Partnerships for the Goals


  • disagreement
  • short-sale restriction
  • salience
  • lottery-related anomalies
  • investor heterogeneity
  • short interest.


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