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Equity Return Dispersion and Stock Market Volatility: Evidence from Multivariate Linear and Nonlinear Causality Tests

Author

Listed:
  • Riza Demirer

    (Department of Economics & Finance, Southern Illinois University Edwardsville, School of Business, Edwardsville, IL 62026-1102, USA)

  • Rangan Gupta

    (Department of Economics, University of Pretoria, Pretoria 0002, South Africa)

  • Zhihui Lv

    (KLASMOE & School of Mathematics and Statistics, Northeast Normal University, Changchun 130024, China)

  • Wing-Keung Wong

    (Department of Finance, Fintech Center, and Big Data Research Center, Asia University, Taichung 41354, Taiwan
    Department of Medical Research, China Medical University Hospital, Taichung 40402, Taiwan
    Department of Economics and Finance, Hang Seng University of Hong Kong, Shatin, Hong Kong 999077, China)

Abstract

We employ bivariate and multivariate nonlinear causality tests to document causality from equity return dispersion to stock market volatility and excess returns, even after controlling for the state of the economy. Expansionary (contractionary) market states are associated with a low (high) level of equity return dispersion, indicating asymmetries in the relationship between return dispersion and economic conditions. Our findings indicate that both return dispersion and business conditions are valid joint forecasters of stock market volatility and excess returns and that return dispersion possesses incremental information regarding future stock return dynamics beyond that which can be explained by the state of the economy.

Suggested Citation

  • Riza Demirer & Rangan Gupta & Zhihui Lv & Wing-Keung Wong, 2019. "Equity Return Dispersion and Stock Market Volatility: Evidence from Multivariate Linear and Nonlinear Causality Tests," Sustainability, MDPI, vol. 11(2), pages 1-15, January.
    • Handle: RePEc:gam:jsusta:v:11:y:2019:i:2:p:351-:d:196929
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    More about this item

    Keywords

    equity return dispersion; stock market volatility; business cycle; multivariate causality; ; C32; E32; G10;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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