Beta dispersion and market timing |
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Institution: | 1. University of Hagen, Universitätsstraße 41, Hagen D-58084, Germany;2. University of Goettingen and Centre for Financial Research Cologne (CFR), Platz der Göttinger Sieben 3, Göttingen D-37073, Germany;3. University of Goettingen, Platz der Göttinger Sieben 3 Göttingen D-37073, Germany |
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Abstract: | The beta dispersion, which is the spread of betas on a stock market, can be interpreted as a measure of market vulnerability. This study examines the economic idea of the beta dispersion and its application as a market return predictor. Based on the empirical beta dispersion observed in the US equity market, the study develops measures to predict future market returns. These dispersion measures have substantial predictive power for future market movements. Moreover, I show that the information content of beta dispersion can be successfully exploited by market timing strategies with the help of distributional regressions. The innovative application of this novel approach of modeling the relationship between multiple variables appears to be quite useful for timing strategies. |
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Keywords: | Time-varying beta Market return predictability Systematic risk Distributional regression Market timing Investment strategies |
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