Stock Market Dispersion, the Business Cycle and Expected Factor Returns
Posted: 20 Apr 2015 Last revised: 8 Aug 2015
Date Written: April 1, 2015
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: Suggested Citation