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This paper presents a dynamic model to demonstrate that, when differences-of-opinion over individual securities have a common component, the valuation of the aggregate market can be higher than its fundamental even if all investors agree on the market fundamental, and the common disagreement drives discount rate news. Using analyst forecast dispersion to measure disagreement, the author finds empirical evidence that individual stock disagreements co-move and the common component mean-reverts, the common disagreement has substantial explanatory power for the time-series variation of equity premium, and the common disagreement correlates with discount-rate news rather than cash-flow news and has explanatory power for the time-series variation of value premium.
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