Heterogeneous Beliefs And Stock Returns

A key hypothesis of traditional asset pricing model is: All investors have Homogeneous Expectations on the future return of the same asset. But, because of some intrinsic mechanism of the market in realistic world, investors have Heterogeneous Beliefs on the return of the same asset, namely divergence of opinions, which will influence the returns of stocks significantly. In this paper we analyze all of the China's A-stock data from 1997 to 2007 by using two selected proxy for divergence of opinions through asset portfolio strategy and cross-section regression strategy, we find that, first, divergence of opinions have obvious effects on stock returns in asset portfolio strategy: the higher the divergence of opinions, the lower the expected returns. Second, the anomalies are also significant when added market factor, size, book-to-market and momentum. Third, no matter added betas, size, book-to-market, momentum or liquidity, the negative relation between divergence of opinions and stock returns is significant in cross-section regression strategy. Fourth, robust test indicates that divergence of opinions has a long period effect on stock returns, and the effect is significant in different years, the result is consistent. We support Miller's (1977) opinion: when both divergence of opinions and short-sale constraint exist, stock prices only reflect the opinions of optimists' and be overestimated, so the expected returns become lower. In contrast with foreign research, the extent of anomalies in China stock market is bigger. Maybe the short-sale constrains, speculation atmosphere and immature investors cause that problem. So the government must take some policies to promote our market develop regularly.