Dispersion of beliefs, Macroeconomic uncertainty, and the Cross-section of stock returns

This paper empirically finds that dispersion of beliefs about the business cycle matters in asset pricing. We construct dispersion of beliefs as the log of cross-sectional dispersion of real GDP forecasts. This measure positively predicts macroeconomic volatility and the investment opportunity set, and lowers down asset prices. In the cross-section, we show that macroeconomic uncertainty is negatively priced. Additionally, the portfolio sorting approach yields 5.2% of the return spread annually, and in turn reveals that stocks less correlated with dispersion of beliefs earns higher returns. Overall evidence highlights the importance of the uncertainty underlying the fluctuation of the economy in asset pricing.