Return Dispersion and Investment Anomalies
53 Pages Posted: 21 Aug 2015 Last revised: 26 Jul 2016
Date Written: July 17, 2016
Recent research finds that cross-sectional return dispersion provides a risk-based explanation for some investment anomalies, including accrual, investment, and momentum strategies. This study extends the analyses of return dispersion to a broad set of anomalies by testing whether the state of return dispersion is associated with anomalous returns. Empirical results for 12 well-known anomalies indicate a robust link between good and bad states of return dispersion and most anomalies. Also, return dispersion helps to explain a number anomalies regardless of their association with investor sentiment. We conclude that market risk related to return dispersion plays an important role in many investment anomalies.
Keywords: Return dispersion, anomalies, asset pricing
JEL Classification: G12, G14
Suggested Citation: Suggested Citation