Beta dispersion and market timing

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. • Beta Dispersion can serve as a measure of stock market vulnerability. • It indicates a potential incapability of the market to deal with systematic shocks. • Beta Dispersion contributes to the predictive accuracy of market return prediction. • The predictive ability of beta dispersion can be confirmed in- and out-of-sample. • Innovative timing strategies based on distributional regressions are introduced.