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Cross-sectional dispersion and expected returns

Thanos Verousis () and Nikolaos Voukelatos

Quantitative Finance, 2018, vol. 18, issue 5, 813-826

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.

Date: 2018
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DOI: 10.1080/14697688.2017.1414515

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