Differences of Opinion in the Stock Market

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School of Business | Doctoral thesis (article-based)
Degree programme
Aalto University publication series DOCTORAL DISSERTATIONS, 16/2018
This dissertation is an examination of differences of opinion in the stock market. Theoretical models of finance posit that heterogeneity in investors' needs or information processing result in differences of opinion that cause trade to occur. However, the prevalence of opinion divergence is not fully known, and neither are its effects on returns and volatility. The three essays in this thesis contribute to the understanding of differences of opinion between investors and their effects on the stock market. The first essay describes a new measure for differences of opinion based on executed trades on the Helsinki Stock Exchange. The measure is calculated as a trade-amount-weighted standard deviation of broker-specific buy-sell ratios. It can measure differences of opinion for all stocks on the market, for each industry, and the market as a whole. Extant literature claims that limited attention may cause investors to base their actions on market-level news instead of focusing on each security separately. This study analyzes the hypothesized common relationship between differences of opinion at the individual stock, industry, and market levels. The results indicate that differences of opinion related to individual securities are mainly driven by market-level disagreement rather than industry-level disagreement. The second essay relates differences of opinion to returns. Stock-specific returns are sorted according to the amount of differences of opinion, and the resulting portfolios are tracked over time. Previous research finds conflicting results about the relationship between differences of opinion and returns. The analysis in the second essay implies that stocks with lower differences of opinion will earn lower future returns than other stocks. Additionally, stocks with large changes in differences of opinion will earn higher returns than stocks with small or no changes in differences of opinion. The third and final essay analyzes the dynamics of volatility in the context of differences of opinion. The relationship between volatility and volume is extensively studied in the finance literature. However, the effect of differences of opinion on volatility and specifically its interaction with the amount of trade have not been widely reported. The results indicate that realized volatility calculated from intraday returns can be contemporaneously explained with both differences of opinion and share turnover. This effect persists up to the three days into the future. More importantly, the interaction between differences of opinion and share turnover is the key component of realized volatility. This interaction causes an asymmetric effect on volatility in cases of high versus low share turnover.
Thesis advisor
Nyberg, Peter, Prof., Aalto University, Department of Finance, Finland
finance, stock market, opinion, decision making, behavioral finance
Other note
  • [Publication 1]: Niemenmaa, Mikko. Commonalities in Differences of Opinion. Unpublished working paper.
  • [Publication 2]: Niemenmaa, Mikko. Differences of Opinion and Returns. Unpublished working paper.
  • [Publication 3]: Niemenmaa, Mikko. Differences of Opinion and Volatility. Unpublished working paper.