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Cross-Sectional Dispersion and Expected Returns

Verousis, Thanos, Voukelatos, Nikolaos (2018) Cross-Sectional Dispersion and Expected Returns. Quantitative Finance, 18 (5). ISSN 1469-7688. (doi:10.1080/14697688.2017.1414515)

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https://doi.org/10.1080/14697688.2017.1414515

Abstract

This study investigates whether the cross-sectional dispersion of stock returns, which reflects the aggregate level of idiosyncratic risk in the market,represents a priced state variable. We find that stocks with high sensitivities to dispersion offer low expected returns. Furthermore, a zero-cost spread portfolio that is long (short) in stocks with low (high) dispersion betas produces a statistically and economically significant return, after accounting for its exposure to other systematic risk factors. Dispersion is associated with a significantly negative risk premium in the cross-section (-1.32% per annum) which is distinct from premia commanded by a set of alternative systematic factors. These results are robust to a wide set of stock characteristics, market conditions, and industry groupings.

Item Type: Article
DOI/Identification number: 10.1080/14697688.2017.1414515
Subjects: H Social Sciences > HG Finance
Divisions: Faculties > Social Sciences > Kent Business School
Depositing User: Nikolaos Voukelatos
Date Deposited: 07 Dec 2017 06:42 UTC
Last Modified: 23 Jul 2019 23:00 UTC
Resource URI: https://kar.kent.ac.uk/id/eprint/65041 (The current URI for this page, for reference purposes)
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