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Stock market dispersion, the business cycle and expected factor returns

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  • Angelidis, Timotheos
  • Sakkas, Athanasios
  • Tessaromatis, Nikolaos

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.

Suggested Citation

  • Angelidis, Timotheos & Sakkas, Athanasios & Tessaromatis, Nikolaos, 2015. "Stock market dispersion, the business cycle and expected factor returns," Journal of Banking & Finance, Elsevier, vol. 59(C), pages 265-279.
  • Handle: RePEc:eee:jbfina:v:59:y:2015:i:c:p:265-279
    DOI: 10.1016/j.jbankfin.2015.04.025
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    6. Riza Demirer & Rangan Gupta & Zhihui Lv & Wing-Keung Wong, 2019. "Equity Return Dispersion and Stock Market Volatility: Evidence from Multivariate Linear and Nonlinear Causality Tests," Sustainability, MDPI, Open Access Journal, vol. 11(2), pages 1-15, January.
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    10. Kuntz, Laura-Chloé, 2020. "Beta dispersion and market timing," Discussion Papers 46/2020, Deutsche Bundesbank.
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    More about this item

    Keywords

    Stock market return dispersion; Business cycle; Market and factor returns;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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