Movements of stock prices when investors have different expectations.

The dissertation is composed of three essays examining the effect of investors' heterogeneity in expectations on movements of stock prices. The first chapter, entitled as Resale Gains, Heterogeneous Expectations and Movements of Stock Prices, examines theoretically the importance of the awareness of heterogeneous expectations on movements of stock prices, allowing short sales. This chapter demonstrates that the equilibrium price of an asset under heterogeneous expectations includes not only the expected present value of future dividends, but also the expected resale gains, even after relaxing the no short sales assumption. The second chapter, entitled as Stock Returns and the Dispersion in Earnings Forecasts, derives a relation between the dispersion in forecasts and future stock returns based on Harrison and Kreps (1978) and shows that the dispersion in forecasts exerts its own positive effect on demand in the market. This chapter presents empirically that the dispersion in expectations has particularly strong predictive power for future stock returns at intermediate horizons (between 25 months and 44 months) and that it contains information about future stock returns aside from the information contained in other variables. In addition, the direction of predictive power from the dispersion for future stock returns is consistent with the derived relation from Harrison and Kreps (1978). This chapter also shows that most movements in the dispersion cannot be explained by other variables, such as common financial indicators, macroeconomic variables, market volatility, or certain non-economic events. Finally, Monte Carlo simulation shows that finite sample biases in long-horizon regressions using the dispersion do not seem so serious. The third chapter, entitled as Differences in the Expectations and the Cross-Section of Stock Returns, presents empirical evidence that the dispersion in analysts' forecasts can explain part of the difference in cross sectional stock returns. Generally, high dispersion stocks show lower returns than low dispersion stocks. Furthermore, the negative relation between stock returns and dispersions continues to hold even after characteristic variables such as firm size and book-to-market ratio are controlled for. Results in this dissertation suggest that an adequate model for stock prices should incorporate the current and expected future heterogeneity in investors' expectations.Ph.D.EconomicsFinanceSocial SciencesUniversity of Michigan, Horace H. Rackham School of Graduate Studieshttp://deepblue.lib.umich.edu/bitstream/2027.42/123520/2/3079570.pd