The Dispersion Effect in International Stock Returns

Abstract

We find that stocks exhibiting high dispersion in analysts’ earnings forecasts not only underperform in the U.S. but also in some European countries. Investigating the abnormal returns generated by the dispersion strategy around the world for the 1990-2008 sample period, we observe that the returns of the strategy are uneven, with large abnormal returns realized during the mid-to-late 1990s and the 2000-2003 period. In particular, we document that the dispersion effect is most profitable in a very narrow time frame around the burst of the technology bubble. As a consequence, the dispersion hedge strategy would have been rather difficult to implement, especially given that the highest mispricing obtains for stocks characterized by high arbitrage costs.

Keywords: International Dispersion Effect, Information Uncertainty, Liquidity

JEL Classification: G12, G14, G15