A0307
Title: A market-level tug of war: Investor heterogeneity and asset pricing
Authors: Ran Tao - University of Bristol (United Kingdom) [presenting]
Chardin Wese Simen - University of Liverpool (United Kingdom)
Lei Zhao - ESCP Business School (France)
Abstract: A daily tug-of-war between opposing investor clientele at the individual stock level has been documented in the asset pricing literature. A market-level tug of war is measured using the cross-sectional intensity of individual tug of war. The capital asset pricing model (CAPM) tends to perform better, and market betas are strongly and positively related to average returns on "quiet days" when the market-level tug of war is less intensive. It is further shown that the well-established findings of a robust risk-return trade-off on important information days (e.g., FOMC announcement days and influential firms earnings announcement days), and during pessimistic sentiment periods hold only when such days coincide with "quiet days". Overall, a novel explanation is provided for the CAPM's empirical failure and shows that investor disagreement has significant implications on asset pricing.
