Cross-sectional dispersion and expected returns |
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Authors: | Thanos Verousis |
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Affiliation: | Newcastle University Business School, Newcastle University, Newcastle, UK |
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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. Dispersion is associated with a significantly negative risk premium in the cross section (–1.32% per annum) which is distinct from premia commanded by alternative systematic factors. These results are robust to stock characteristics and market conditions. |
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Keywords: | Cross-sectional dispersion Cross section of stock returns Pricing factor |
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