Cross-sectional dispersion and expected returns
Verousis, Thanos Voukelatos, Nikolaos
Verousis, Thanos
Voukelatos, Nikolaos
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Journal article with impact factor
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Publication Year
2018-05-04
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Quantitative Finance
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18
Publication Issue
5
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Abstract
This study investigates whether the cross-sectional dispersion of stock returns, which reflects the aggregate level of idiosyncratic risk in the market, represents a priced state variable. We find that stocks with high sensitivities to dispersion offer low expected returns. Furthermore, a zero-cost spread portfolio that is long (short) in stocks with low (high) dispersion betas produces a statistically and economically significant return. Dispersion is associated with a significantly negative risk premium in the cross section (–1.32% per annum) which is distinct from premia commanded by alternative systematic factors. These results are robust to stock characteristics and market conditions.
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38 Economics, 3502 Banking, Finance and Investment, 3801 Applied Economics, 35 Commerce, Management, Tourism and Services