Firm-Level Return Dispersion and the Future Volatility of Aggregate Stock Market Returns

Abstract:     
We find a sizable positive relation between firm return dispersion and future market-level volatility in U.S. monthly equity returns from 1927 to 1995. This intertemporal relation remains strong when controlling for economic conditions and for return shocks in the aggregate stock market, widely-used factor-mimicking portfolios, and government bonds. In contrast, the well-known positive relation between market-return shocks and future market-level volatility largely disappears when controlling for firm return dispersion. We also document how firm return dispersion moves with the contemporaneous market return and with economic conditions. Collectively, our evidence suggests that the time variation in firm return dispersion has important market-wide implications.

Note: This paper was previously titled: "Uncertainty, Cross-Sectional Return Dispersion, and Time Variation in Stock Market Volatility"

Keywords: Equity market volatility, return dispersion

JEL Classification: D80, G12, G14

Accepted Paper Series