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Cross-sectional dispersion and expected returns

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  • Thanos Verousis
  • Nikolaos Voukelatos

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.

Suggested Citation

  • Thanos Verousis & Nikolaos Voukelatos, 2018. "Cross-sectional dispersion and expected returns," Quantitative Finance, Taylor & Francis Journals, vol. 18(5), pages 813-826, May.
    • Handle: RePEc:taf:quantf:v:18:y:2018:i:5:p:813-826
    DOI: 10.1080/14697688.2017.1414515
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    Cited by:

    1. Adam Zaremba & Jacob Koby Shemer, 2018. "Price-Based Investment Strategies," Springer Books, Springer, number 978-3-319-91530-2, January.
    2. Dolinar Denis & Zoričić Davor & Golubić Zrinka Lovretin, 2019. "Application of semi-deviation as a proxy for the expected return estimation in the Croatian equity market," Croatian Review of Economic, Business and Social Statistics, Sciendo, vol. 5(1), pages 9-20, May.
    3. Calès, Ludovic & Chalkis, Apostolos & Emiris, Ioannis Z., 2019. "On the cross-sectional distribution of portfolio returns," Working Papers 2019-11, Joint Research Centre, European Commission.
    4. Ludovic Cal`es & Apostolos Chalkis & Ioannis Z. Emiris, 2021. "The cross-sectional distribution of portfolio returns and applications," Papers 2105.06573, arXiv.org.
    5. Eriksen, Jonas N., 2019. "Cross-sectional return dispersion and currency momentum," Journal of Empirical Finance, Elsevier, vol. 53(C), pages 91-108.

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