Are Disagreements Agreeable? Evidence from Information Aggregation

Most studies on disagreement focus on cross-sectional asset returns and the well-recognized disagreement measures generally cannot predict the stock market with a horizon less than 12 months. This paper proposes three aggregate disagreement indexes by aggregating information across 20 disagreement measures. We show that disagreement measures collectively have a common component that has significant power in predicting the stock market both in- and out-of-sample. Consistent with the theory developed by Atmaz and Basak (2018), the indexes asymmetrically forecast the market with greater power in high sentiment periods. Moreover, the indexes negatively predict economic activities, and positively predict market volatility, illiquidity, and trading volume.