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Return dispersion and expected returns

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  • Xiaoquan Jiang

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Abstract

This paper proposes a two-factor asset-pricing model that incorporates market return and return dispersion. Consistent with this model, we find that stocks with higher sensitivities to return dispersion have higher average returns, and that return dispersion carries a significant positive price of risk. In particular, the return dispersion factor dominates the book-to-market factor in explaining cross-sectional expected returns. The return dispersion model outperforms the CAPM, MVM, IVM, and FF-3M when using a set of 5×5 test portfolios constructed from NYSE and AMEX stock returns from August 1963 to December 2005. Return dispersion continues to play an important role in explaining the cross-sectional variation of expected returns, even when market volatility, idiosyncratic volatility, size, book-to-market factors, and a momentum factor are included. This study sheds some light on the ability of return dispersion to explain expected returns beyond the standard asset-pricing factors. Our finding suggests that return dispersion captures two dimensions of systematic risk: the business cycle and fundamental economic restructuring. Copyright Swiss Society for Financial Market Research 2010

Suggested Citation

  • Xiaoquan Jiang, 2010. "Return dispersion and expected returns," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 24(2), pages 107-135, June.
  • Handle: RePEc:kap:fmktpm:v:24:y:2010:i:2:p:107-135
    DOI: 10.1007/s11408-009-0122-1
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    File URL: http://hdl.handle.net/10.1007/s11408-009-0122-1
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    References listed on IDEAS

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    1. Xiaoquan Jiang & Bong-Soo Lee, 2006. "The Dynamic Relation Between Returns and Idiosyncratic Volatility," Financial Management, Financial Management Association International, vol. 35(2), pages 43-65, June.
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    Cited by:

    1. Demirer, Rıza & Jategaonkar, Shrikant P., 2013. "The conditional relation between dispersion and return," Review of Financial Economics, Elsevier, vol. 22(3), pages 125-134.
    2. Maio, Paulo, 2016. "Cross-sectional return dispersion and the equity premium," Journal of Financial Markets, Elsevier, vol. 29(C), pages 87-109.
    3. 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.
    4. repec:eee:finana:v:56:y:2018:i:c:p:264-280 is not listed on IDEAS
    5. repec:kap:jrefec:v:55:y:2017:i:3:d:10.1007_s11146-016-9587-7 is not listed on IDEAS
    6. Chichernea, Doina C. & Holder, Anthony D. & Petkevich, Alex, 2015. "Does return dispersion explain the accrual and investment anomalies?," Journal of Accounting and Economics, Elsevier, vol. 60(1), pages 133-148.

    More about this item

    Keywords

    Return dispersion; Cross-sectional returns; Asset pricing; Market volatility; Idiosyncratic volatility; G11; G12;

    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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