Working Papers

Forecast Dispersion and Information Selection

Abstract: I show that dispersion among equity analysts' forecasts increases following earnings announcements. I provide evidence that this is due to information selection: analysts rely on different subsets of public information revealed in earnings announcements when revising their forecasts in a high-dimensional setting. Using text data from analysts' reports, I show that analysts cite different information when they revise their forecasts following earnings announcements, providing evidence of information selection. Results from elastic net regressions corroborate these findings but further imply the existence of a common benchmark to which analysts can compare their forecasts. The existence of a common benchmark explains the decrease in forecast dispersion in the periods between earnings announcements. To formalize these findings, I develop a simple model of forecast-making processes under a common benchmark to explain the dynamics of forecast dispersion. My results highlight the importance of information selection as a driver of disagreement, especially in high-dimensional environments.

Disagreement, Subjective Uncertainty, and the Stock Market (with Seung Hyeong Lee and Younggeun Yoo)

Abstract: We propose a method to separately quantify cross-sectional disagreement and subjective uncertainty at firm and fiscal quarter levels, and investigate how they jointly affect stock market volatility, returns, and trading volume. While disagreement and subjective uncertainty are often treated interchangeably in empirical research, we find that conflating the two may lead to misleading or even opposite results. Subjective uncertainty is positively correlated with volatility when disagreement is low, but this relationship reverses and the correlation becomes negative when disagreement is high. These results suggest the need for caution when using volatility as a proxy for agents' uncertainty, especially during periods of heightened disagreement. We also find that disagreement and subjective uncertainty have opposite yet interactive effects on returns and trading volume. Stocks with higher disagreement earn lower returns and exhibit higher trading volumes, with these effects amplified 2-3 times when subjective uncertainty is low. Conversely, stocks with higher subjective uncertainty earn higher returns and experience lower trading volumes, with these effects similarly amplified when disagreement is high. We provide a theoretical framework and perform numerical simulations to explain our empirical findings.