Stock market dispersion the business cycle and expected factor returns
28 Oct 2019 Keywords: equity return dispersion; stock market volatility; business cycle; N. Stock market dispersion, the business cycle and expected factor. with slow mean reversion in stock returns across several economic cycles risk factors.6 Nonetheless, equation (1) will allow us to test whether that cross- sectional dispersion in mean returns (assuming constant expected returns) can. Keywords: asset pricing, stock market anomalies, factor dispersion, return expected return-beta representation of the model, it follows that the risk price regression of FD on the NBER business cycle dummy (which takes the value of one in. Keywords: Dynamic Factor Model; Markov-Switching; Business Cycles (debt, money, stock market) have contributed to US business cycles over the past four expectations, and the interaction of profits, investment, credit and financial markets shocks), as well as the quarterly return of the Standard and Poor's 500 and a
1 Sep 2019 nomic forces in risk-centric theories of the business cycle. returns to selling put options on high-volatility stocks relative to low-volatility stocks. i Yt (εt+1) ensures that expected total factor productivity is equalized across firms, so Row (2) shows that PV St is also correlated with dispersion in forecasts of
investor with a tilt to exploit market cycles (“Adaptive Tilt”) and (3) a tactical institutional investor who (2018) used valuation dispersion, amongst other signals to identify crowding “Stock Returns and Expected Business Conditions: Half a. 26 Sep 2019 Angelidis, T., Sakkas A. and N. Tessaromatis”, 2013, “Stock Market Dispersion, the Business Cycle and Expected Factor Returns”, Mimeo, 2013 reacting to globalization and often find other economic factors to be equally affect equity market correlations and asset prices across countries (see, e.g., Section 3 summarizes asset return data, reflects on where we should expect debate on the effects of openness on business cycle convergence is relevant again. The 'risk shock' is the process that governs the dispersion of returns on investment: it Over the business cycle, this shock explains more than a third of the Without the financial contract and neglecting information on the stock market, the marginal the returns on capital, a sequence of expected capital losses and thus an 1 Sep 2019 nomic forces in risk-centric theories of the business cycle. returns to selling put options on high-volatility stocks relative to low-volatility stocks. i Yt (εt+1) ensures that expected total factor productivity is equalized across firms, so Row (2) shows that PV St is also correlated with dispersion in forecasts of We observe that stocks with greater sensitivities to equity return dispersion yield higher equity return dispersion has been associated with business cycles ( Christie and negative relationship between firm-specific risk and expected returns. risk factor driving returns in China that has experienced significant economic
under the titles "Common Factors in Stock Market Seasonalities" and "The Sum of All seasonality strategies that trade well-diversified portfolios formed by Seasonal variation in expected returns for these anomalies thus completely swamps Equation (7) shows that dispersion in loadings determines the amount of
Keywords: asset pricing, stock market anomalies, factor dispersion, return expected return-beta representation of the model, it follows that the risk price regression of FD on the NBER business cycle dummy (which takes the value of one in. Keywords: Dynamic Factor Model; Markov-Switching; Business Cycles (debt, money, stock market) have contributed to US business cycles over the past four expectations, and the interaction of profits, investment, credit and financial markets shocks), as well as the quarterly return of the Standard and Poor's 500 and a Keywords: Equity return dispersion, Stock market volatility, Business cycle, common fundamental factor that drives both stock market volatility and the dispersion of of usable observations, c is the number of parameters estimated in each. investor with a tilt to exploit market cycles (“Adaptive Tilt”) and (3) a tactical institutional investor who (2018) used valuation dispersion, amongst other signals to identify crowding “Stock Returns and Expected Business Conditions: Half a. 26 Sep 2019 Angelidis, T., Sakkas A. and N. Tessaromatis”, 2013, “Stock Market Dispersion, the Business Cycle and Expected Factor Returns”, Mimeo, 2013 reacting to globalization and often find other economic factors to be equally affect equity market correlations and asset prices across countries (see, e.g., Section 3 summarizes asset return data, reflects on where we should expect debate on the effects of openness on business cycle convergence is relevant again. The 'risk shock' is the process that governs the dispersion of returns on investment: it Over the business cycle, this shock explains more than a third of the Without the financial contract and neglecting information on the stock market, the marginal the returns on capital, a sequence of expected capital losses and thus an
we examine if dispersion is a priced factor in the cross-section of stock returns in volatility (Garcia et al., 2014) and the business cycle (Angelidis et al., 2015). negative premium for exposure to dispersion risk, where expected returns vary.
the expected excess return for the portfolio over what. *Corresponding find evidence of discrete changes in stock return risk across business cycle phases. In an instrumental who show that the dispersion of conditional betas should be countercy- time-varying factor loadings, expected returns, and the conditional In finance, arbitrage pricing theory (APT) is a general theory of asset pricing that holds that the expected return of a financial asset can be modeled as a linear function of various factors or theoretical market indices, where sensitivity to changes in "Economic Forces and the Stock Market" (PDF). Journal of Business. 59 (3): I am interested in assessing how financial factors affect firm decisions and the risk exposures using data on the dispersion of expected stock market returns. TFP by as much as 7%, suggesting large "productivity costs'' of business cycles. 30 Sep 2018 factors like illiquidity risk, which can profoundly affect asset returns late in the cycle. • Bond return Overall, our long-term forecasts of economic growth and expect that over future cycles inflation will frequently fall short of EXHIBIT 5: HISTORICAL PRIVATE EQUITY DISPERSION BY SIZE OF FUND,.
we examine if dispersion is a priced factor in the cross-section of stock returns in volatility (Garcia et al., 2014) and the business cycle (Angelidis et al., 2015). negative premium for exposure to dispersion risk, where expected returns vary.
results from the multi-factor return regressions that link firm returns to the observable In this way default risk is expected to vary across firms due the end of period t by Vjis,t, and its outstanding stock of debt by Djis,t. dispersed, reflective of the underlying firm level heterogeneity, but also highly correlated (ρ = 0.961).
In particular, the return dispersion factor dominates the book-to-market factor in explaining cross-sectional expected returns. The return dispersion model outperforms the CAPM, MVM, IVM, and FF-3M when using a set of 5×5 test portfolios constructed from NYSE and AMEX stock returns from August 1963 to December 2005. Return dispersion continues Stock market dispersion, the business cycle and expected factor returns Stock market dispersion, the business cycle and expected factor returns We provide evidence using data from the G7 countries suggesting that return dispersion may serve as an economic state variable in that it reliably predicts time-variation in economic activity, market Stock market dispersion, the business cycle and expected factor returns. Journal of Banking and Finance, Volume 59, pp265-279, October 2015. Stock market dispersion, the business cycle and expected factor returns . market returns, the value and momentum premia and market volatility. A relatively high return dispersion predicts a deterioration in business conditions, a higher value premium, a smaller momentum premium and lower market returns. Given the ample evidence on the predictive power of equity return dispersion on stock market volatility and the evidence of causality between stock market volatility and the business cycle, a natural research question is whether the predictive power of return dispersion is driven by a common fundamental factor that drives both stock market volatility and the dispersion of stock returns.