Abstract
Using the turnover decomposition model, we extract unexpected trading volume from trading activity to measure divergence in investors' opinions and explore the explanatory power of that divergence on stock returns. Portfolios built according to the magnitude of opinion divergence are significantly profitable. The expected returns of portfolios with small opinion divergence are significantly higher than other portfolios, particularly for small companies. When this pricing factor is included in the CAPM and the Fama–French three-factor model, the influence of opinion divergence on stock returns during the current month is significantly positive, but it is significantly negative for the next month. When further considering liquidity, momentum reversal and other factors, the conclusion is still valid.
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