When Is the Price of Analysts’ Disagreement Risk Positive?

Alexander David and Amel Farhat

♦ We provide robust evidence that the price of analysts’ disagreement risk in the cross-section of stock returns changes sign; it’s  positive (negative) in periods of high (low) disagreement. We construct a general equilibrium model in which analysts have heterogeneous beliefs about aggregate earnings growth. Each asset’s risk premium depends on (i) the market portfolio, (ii) the macroeconomic factor, and, (iii) a “squared-beta” factor. (i) decreases and (iii) increases with disagreement as investors choose lower cash flow beta assets during periods of high disagreement.  We find support for such a flight-to-safety in the data.

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