Are disagreements agreeable? Evidence from information aggregation

Disagreement measures are known to predict cross-sectional stock returns but fail to predict market returns. This paper proposes a partial least squares disagreement index by aggregating information across individual disagreement measures and shows that this index significantly predicts market returns both in- and out-of-sample. Consistent with the theory in Atmaz and Basak (2018), the disagreement index asymmetrically predicts market returns with greater power in high-sentiment periods, is positively associated with investor expectations of market returns, predicts market returns through a cash flow channel, and can explain the positive volume-volatility relationship.