Cross-sectional return dispersion and the equity premium

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14 Citations (Scopus)

Abstract

In this paper, I examine whether stock return dispersion (RD) provides useful information about future stock returns. RD consistently forecasts a decline in the excess market return at multiple horizons, and compares favorably with alternative predictors used in the literature. The out-of-sample performance of RD tends to beat the alternative predictors, and is economically significant as indicated by the certainty equivalent gain associated with a trading investment strategy. RD has greater forecasting power for big and growth stocks compared to small and value stocks, respectively. I discuss a theoretical mechanism giving rise to the negative correlation between RD and the equity premium.
Original languageEnglish
Peer-reviewed scientific journalJournal of Financial Markets
Volume29
Issue numberJune
Pages (from-to)87-109
Number of pages23
ISSN1386-4181
DOIs
Publication statusPublished - 2016
MoE publication typeA1 Journal article - refereed

Keywords

  • 512 Business and Management
  • Asset pricing
  • Stock return dispersion
  • Cross-sectional variance of stock returns
  • Predictability of stock returns
  • Out-of-sample predictability

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