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Asymmetric cross-sectional dispersion in stock returns: evidence and implications

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  • Gregory R. Duffee
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    Abstract

    This paper documents that daily stock returns of both firms and industries are more dispersed when the overall stock market rises than when it falls. This positive relation is conceptually distinct from - and appears unrelated to - asymmetric return correlations. I argue that the source of the relation is positive skewness in sector-specific return shocks. I use this asymmetric behavior to explain a previously-observed puzzle: aggregate trading volume tends to be higher on days when the stock market rises than when it falls. The idea proposed here is that trading is more active on days when the market rises because on those days there is more non-market news on which to trade. I find that empirically, the bulk of the relation between volume and the signed market return is explained by variations in non-market volatility.

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    Bibliographic Info

    Paper provided by Federal Reserve Bank of San Francisco in its series Working Paper Series with number 2000-18.

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    Date of creation: 2001
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    Handle: RePEc:fip:fedfwp:2000-18

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    Keywords: Stock market ; Econometric models;

    References

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    1. Jones, Charles M & Kaul, Gautam & Lipson, Marc L, 1994. "Transactions, Volume, and Volatility," Review of Financial Studies, Society for Financial Studies, vol. 7(4), pages 631-51.
    2. G. William Schwert & Paul J. Seguin, 1991. "Heteroskedasticity in Stock Returns," NBER Working Papers 2956, National Bureau of Economic Research, Inc.
    3. Epps, Thomas W, 1975. "Security Price Changes and Transaction Volumes: Theory and Evidence," American Economic Review, American Economic Association, vol. 65(4), pages 586-97, September.
    4. Jain, Prem C. & Joh, Gun-Ho, 1988. "The Dependence between Hourly Prices and Trading Volume," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 23(03), pages 269-283, September.
    5. LONGIN, Fran├žois & SOLNIK, Bruno, 2000. "Extreme correlation of international equity markets," Les Cahiers de Recherche 705, HEC Paris.
    6. Harris, Lawrence, 1986. "Cross-Security Tests of the Mixture of Distributions Hypothesis," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 21(01), pages 39-46, March.
    7. John Y. Campbell & Ludger Hentschel, 1991. "No News is Good News: An Asymmetric Model of Changing Volatility in Stock Returns," NBER Working Papers 3742, National Bureau of Economic Research, Inc.
    8. John Y. Campbell, 2001. "Have Individual Stocks Become More Volatile? An Empirical Exploration of Idiosyncratic Risk," Journal of Finance, American Finance Association, vol. 56(1), pages 1-43, 02.
    9. Harvey, Campbell R. & Siddique, Akhtar, 1999. "Autoregressive Conditional Skewness," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 34(04), pages 465-487, December.
    10. Longin, Fran├žois & Solnik, Bruno H, 2000. "Extreme Correlation of International Equity Markets," CEPR Discussion Papers 2538, C.E.P.R. Discussion Papers.
    11. French, Kenneth R. & Schwert, G. William & Stambaugh, Robert F., 1987. "Expected stock returns and volatility," Journal of Financial Economics, Elsevier, vol. 19(1), pages 3-29, September.
    12. Harris, Lawrence, 1987. "Transaction Data Tests of the Mixture of Distributions Hypothesis," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 22(02), pages 127-141, June.
    13. Gallant, A Ronald & Rossi, Peter E & Tauchen, George, 1992. "Stock Prices and Volume," Review of Financial Studies, Society for Financial Studies, vol. 5(2), pages 199-242.
    14. Epps, Thomas W., 1977. "Security Price Changes and Transaction Volumes: Some Additional Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 12(01), pages 141-146, March.
    15. Fama, Eugene F. & French, Kenneth R., 1997. "Industry costs of equity," Journal of Financial Economics, Elsevier, vol. 43(2), pages 153-193, February.
    16. Campbell R. Harvey & Akhtar Siddique, 2000. "Conditional Skewness in Asset Pricing Tests," Journal of Finance, American Finance Association, vol. 55(3), pages 1263-1295, 06.
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