Return Dispersion and the Predictability of Stock Returns

48 Pages Posted: 17 Jan 2012 Last revised: 28 Aug 2013

See all articles by Paulo F. Maio

Paulo F. Maio

Hanken School of Economics - Department of Finance and Statistics

Multiple version iconThere are 2 versions of this paper

Date Written: August 27, 2013

Abstract

This paper analyzes whether stock return dispersion (cross-sectional variance of equity portfolio returns) provides useful information about future stock returns, both at the aggregate and portfolio levels. Return dispersion consistently forecasts a decline in the (excess) stock market return, and compares favorably with alternative predictors. Furthermore, return dispersion outperforms the alternative variables in forecasting the (excess) market return out-of-sample. The results from both in-sample and out-of-sample regressions show that return dispersion has greater forecasting power for large and growth stocks compared to small and value stocks, respectively. Return dispersion also helps to forecast stock market volatility at short horizons.

Keywords: asset pricing, return dispersion;\, predictability of stock returns, out-of-sample predictability, stock market volatility, size, value, and momentum anomalies

JEL Classification: G12, G14, G17

Suggested Citation

Maio, Paulo F., Return Dispersion and the Predictability of Stock Returns (August 27, 2013). Available at SSRN: https://ssrn.com/abstract=1986791 or http://dx.doi.org/10.2139/ssrn.1986791

Paulo F. Maio (Contact Author)

Hanken School of Economics - Department of Finance and Statistics ( email )

FI-00101 Helsinki
Finland

HOME PAGE: http://sites.google.com/site/paulofmaio/home

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