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Cross-sectional return dispersion and the equity premium

Listed author(s):
  • Maio, Paulo
Registered author(s):

    In this paper, I examine whether stock return dispersion (RD) provides useful information about future stock returns. RD consistently forecasts a decline in the excess market return at multiple horizons, and compares favorably with alternative predictors used in the literature. The out-of-sample performance of RD tends to beat the alternative predictors, and is economically significant as indicated by the certainty equivalent gain associated with a trading investment strategy. RD has greater forecasting power for big and growth stocks compared to small and value stocks, respectively. I discuss a theoretical mechanism giving rise to the negative correlation between RD and the equity premium.

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    File URL: http://www.sciencedirect.com/science/article/pii/S1386418115000609
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    Article provided by Elsevier in its journal Journal of Financial Markets.

    Volume (Year): 29 (2016)
    Issue (Month): C ()
    Pages: 87-109

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    Handle: RePEc:eee:finmar:v:29:y:2016:i:c:p:87-109
    DOI: 10.1016/j.finmar.2015.09.001
    Contact details of provider: Web page: http://www.elsevier.com/locate/finmar

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