Disagreement In The Hong Kong Warrants Market And Stock Returns

Traditional asset pricing theories,such as Capital Asset Pricing Theory,are based on one important assumption-that investors have homogeneous Expectations.However,the existence of many financial anomalies in reality has forced academics to relax the assumptions of the models.The concept of heterogeneous beliefs,which is a relaxation of the homogeneous expectations hypothesis,has been widely accepted and applied since its inception.A large number of scholars have studied investor disagreement,Existing studies mostly rely on disagreement measures that proxy for differences in investor information sets,such as analysts’ forecast dispersion.Several papers point out that this indicator cannot accurately measure investor disagreement(Goetzmann and Massa,2005;Jiang and Sun,2014;Koijen and Yogo,2019).In addition,many scholars have studied the impact of disagreement on stock returns,but so far,no consensus has been reached.Therefore,this paper focuses on the Hong Kong market and aims to construct a reasonable indicator of disagreement to study the predictive power of disagreement on stock returns.Derivative warrants have unique advantages for the study of investor disagreement.Firstly,the high embedded leverage makes derivative warrants attractive to investors with strong convictions.Secondly,unlike the equity market,shorting is easier in the derivative warrants market.Finally,in Hong Kong,derivative warrants are actively traded.Therefore,this paper measures stock-level divergence in the derivative warrants market based on trading data from the Hong Kong derivative warrants market and argues for the reasonableness of the indicators.Firstly,this paper examines the relationship between disagreement and future stock returns.It is concluded that disagreement has a significant negative relationship with future returns and that disagreement has a persistent predictive power on returns.Secondly,this paper examines the effect of short selling restrictions on the return predictive power of disagreement.The results show that stocks with stronger short selling restrictions are more severely overvalued and the negative predictive effect of disagreement on returns is stronger.Finally,this paper investigates whether investor sentiment affects the relationship between disagreement and stock returns.The results show that the degree of disagreement is greater during high sentiment periods.During high sentiment periods,disagreement is negatively related to future stock returns,but during low sentiment periods,this relationship no longer existed.