Stock Market Dispersion, the Business Cycle and Expected Factor Returns

Posted: 20 Apr 2015 Last revised: 8 Aug 2015

See all articles by Timotheos Angelidis

Timotheos Angelidis

University of Peloponnese - Department of Economics

Athanasios Sakkas

University of Southampton

Nikolaos Tessaromatis

EDHEC Business School

Date Written: April 1, 2015

Abstract

We provide evidence using data from the G7 countries suggesting that return dispersion may serve as an economic state variable in that it reliably predicts time-variation in economic activity, market returns, the value and momentum premia and market volatility. A relatively high return dispersion predicts a deterioration in business conditions, a higher value premium, a smaller momentum premium and lower market returns. Dispersion based market and factor timing strategies outperform out-of-sample buy and hold strategies. The evidence are robust to alternative specifications of return dispersion and are not driven by US data. Return dispersion conveys incremental information relative to idiosyncratic risk.

Keywords: Stock Market Return Dispersion, Business Cycle, Market and Factor Returns

JEL Classification: G12, G14

Suggested Citation

Angelidis, Timotheos and Sakkas, Athanasios and Tessaromatis, Nikolaos, Stock Market Dispersion, the Business Cycle and Expected Factor Returns (April 1, 2015). Journal of Banking and Finance, Vol. 59, pp. 265-279, October 2015. Available at SSRN: https://ssrn.com/abstract=2596227

Timotheos Angelidis (Contact Author)

University of Peloponnese - Department of Economics ( email )

Tripolis, 22100
Greece

Athanasios Sakkas

University of Southampton ( email )

University Road
Highfield
Southampton, Hampshire SO17 1BJ
United Kingdom
+44(0)2380593551 (Phone)

Nikolaos Tessaromatis

EDHEC Business School ( email )

58 rue du Port
Lille, 59046
France

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