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Risk and return in the Chinese stock market: Does equity return dispersion proxy risk?

Author

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  • Chen, Chun-Da
  • Demirer, Riza
  • Jategaonkar, Shrikant P.

Abstract

We examine whether equity return dispersion, measured by the cross-sectional standard deviation of stock returns, is systematically priced in the cross-section of stock returns in China. We find that return dispersion carries a positive price of risk even after controlling for market, size, book-to-market, and idiosyncratic volatility effects. We observe that stocks with greater sensitivities to equity return dispersion yield higher average returns. The finding of a significant return dispersion effect is robust to alternative portfolio sorts based on the well-established risk factors as well as industry portfolios. We argue that equity return dispersion captures the fundamental uncertainty associated with economic transitions and the flexibility of adaptability to fundamental economic restructuring that cannot be captured by market and firm level factors. To that end, return dispersion serves as a more meaningful proxy for risk in this emerging market that has experienced a significant economic transition during much of the sample period.

Suggested Citation

  • Chen, Chun-Da & Demirer, Riza & Jategaonkar, Shrikant P., 2015. "Risk and return in the Chinese stock market: Does equity return dispersion proxy risk?," Pacific-Basin Finance Journal, Elsevier, vol. 33(C), pages 23-37.
  • Handle: RePEc:eee:pacfin:v:33:y:2015:i:c:p:23-37
    DOI: 10.1016/j.pacfin.2015.03.005
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    References listed on IDEAS

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    Cited by:

    1. Liu, Dehong & Gu, Hongmei & Xing, Tiancai, 2016. "The meltdown of the Chinese equity market in the summer of 2015," International Review of Economics & Finance, Elsevier, vol. 45(C), pages 504-517.
    2. Riza Demirer & Rangan Gupta & Zhihui Lv & Wing-Keung Wong, 2018. "Equity Return Dispersion and Stock Market Volatility: Evidence from Multivariate Linear and Nonlinear Causality Tests," Working Papers 201846, University of Pretoria, Department of Economics.
    3. Linnenluecke, Martina K. & Chen, Xiaoyan & Ling, Xin & Smith, Tom & Zhu, Yushu, 2016. "Emerging trends in Asia-Pacific finance research: A review of recent influential publications and a research agenda," Pacific-Basin Finance Journal, Elsevier, vol. 36(C), pages 66-76.

    More about this item

    Keywords

    Equity return dispersion; Asset pricing; Chinese stock market;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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