Stock Return Dispersion Research Articles

International Real Estate Review

The primary contribution of this study is to comprehensively assess whether public real estate and stock markets are linked at the local, regional, and global levels, and assess the evolution of their dynamic relationship and gradual integration during the last two decades. For individual pairs of real estate and stock markets, our analysis shows that the current levels of local, regional, and global correlations between real estate and stock markets are time-varying, and at most, moderate at the respective integration levels. The real estate and stock markets are both contemporaneously and causally linked in their returns and volatilities; however, the causality relationship appears weaker. In the long run, the real estate markets have slowly become more integrated with the global and regional stock markets, while less integrated with the local stock markets. In addition, the extracted common factors allow for a direct assessment of the dynamic relationships between the real estate and stock markets as a group, and thereby complement the individual results. Finally, there appears to be a declining real estate and stock return dispersion and differential at the local, regional, and global levels for all nine economies studied in this research work, which indicate a tendency of return convergence between real estate and stock markets in the international environment.

Persistence of ex-ante volatility and the cross-section of stock returns

We suggest a new measure of total ex-ante volatility (EAV) in stock returns, which includes traditional non-market (or idiosyncratic) risk and the unexpected component of market return. We find that the portfolio-level EAV measure exhibits strong predictive power for the cross-section of average returns during the post-1963 period. We demonstrate that (1) the persistence of EAV gives rise to economically significant spread in returns between value and growth stocks, and (2) the cross-sectional dispersion in stock returns is positively related to the estimated value of EAV. The benefit of the EAV measure is that it is countercyclical and contains relevant information about the time-variation in value premium.

When Opportunity Knocks: Cross-Sectional Return Dispersion and Active Fund Performance

Active opportunity in the market, measured by cross-sectional dispersion in stock returns, significantly influences fund performance. Active strategies have the greatest impact on returns during periods of high dispersion, when alpha produced by the most active funds significantly exceeds that produced in other months. The outperformance of the most relative to the least active funds is also concentrated in months of high dispersion. Deciding when to invest in active funds, therefore, can be as important to generating outperformance as deciding which funds to invest in. Switching between highly active and passive funds based on dispersion produces significant alpha of over 2.7% p.a. after fees. This paper adds a new dimension to understanding how active funds can be used to generate value, by combining identification of which managers have the greatest potential to outperform the market with insight into when the market is most conducive to outperformance.

Evaluating the performance of global emerging markets equity exchange-traded funds

We examine the performance of passively managed exchange-traded funds (ETFs) that provide exposure to global emerging markets equities. We find that the tracking errors of these funds are substantially higher than previously reported levels for developed markets ETFs. ETFs that use statistical index replication techniques turn out to be especially prone to high tracking errors, and particularly so during periods of high cross-sectional dispersion in stock returns. At the same time, we find no convincing evidence that these funds earn higher returns than ETFs that rely on full-replication techniques.

Return Dispersion and the Predictability of Stock Returns

This paper analyzes whether stock return dispersion (cross-sectional variance of equity portfolio returns) provides useful information about future stock returns, both at the aggregate and portfolio levels. Return dispersion consistently forecasts a decline in the (excess) stock market return, and compares favorably with alternative predictors. Furthermore, return dispersion outperforms the alternative variables in forecasting the (excess) market return out-of-sample. The results from both in-sample and out-of-sample regressions show that return dispersion has greater forecasting power for large and growth stocks compared to small and value stocks, respectively. Return dispersion also helps to forecast stock market volatility at short horizons.

The long-run relationship between stock return dispersion and output

Based on the rational that some industry groups are more closely linked to the business cycle than others, we re-examined a previous analysis on the long-term relationship between stock return dispersion by industry and Gross Domestic Product (GDP), which evaluated data until 1987 by extending it to 2008. Using Mean Square Forecast Errors (MSFE) statistics, we find that incorporating the return dispersion in Vector Autoregressive (VAR) models enhances their forecasting power for output (GDP) in the long run. This article also determines that the relationship between stock return dispersion by industry and GDP is tenuous in the recent decade from 1999.

Evaluating the Performance of Global Emerging Markets Equity Exchange-Traded Funds

We examine the performance of passively managed exchange-traded funds (ETFs) that provide exposure to global emerging markets equities. We find that the tracking errors of these funds are substantially higher than previously reported levels for developed markets ETFs. ETFs that use statistical index replication techniques turn out to be especially prone to high tracking errors, and particularly so during periods of high cross-sectional dispersion in stock returns. At the same time, we find no convincing evidence that these funds earn higher returns than ETFs that rely on full-replication techniques.

An Assessment of the Relationship between Public Real Estate Markets and Stock Markets at the Local, Regional, and Global Levels

The primary contribution of this study is to assess whether public real estate markets and stock markets are linked at the local, regional, and global levels, and to assess the evolution of their dynamic relationship and gradual integration during the last two decades. For individual pairs of real estate and stock markets, our analysis shows that the current levels of local, regional, and global correlation between real estate and stock markets are time-varying and are, at most, moderate at the respective integration levels. The real estate and stock markets are both contemporaneously and causally linked in their returns and volatilities; however the causality relationship appears weaker. In the long run, the real estate markets have slowly become more integrated with the global and regional stock markets; while less integrated with the local stock markets. In addition, the extracted common factors allow for a direct assessment of the dynamic relationships between the real estate and stock markets as a group, and thereby complement the individual results. Finally, there appears to be a declining real estate and stock return dispersion and differential at the local, regional, and global levels for all nine economies, indicating a tendency of return convergence between real estate and stock market in an international environment.

The Cross-Sectional Dispersion of Stock Returns, Alpha, and the Information Ratio

Both the cross-sectional dispersion of U.S. stock returns and the VIX provide forecasts of alpha dispersion across high-performing and low-performing portfolios of stocks that are statistically and economically significant. These findings suggest that absolute return investors can use cross-sectional dispersion and time-series volatility as signals to improve the tactical timing of their alpha-focused strategies. Because active risk increases by a greater amount than alpha, however, high-return-dispersion/high-VIX periods are followed by slightly lower information ratio dispersion. Therefore, relative return investors who keep score in an information ratio framework are unlikely to find return dispersion useful as a signal regarding when to increase or decrease the activeness of their portfolio strategies. <b>TOPICS:</b>Volatility measures, performance measurement, passive strategies

Cross-Sectional Return Dispersion and Time Variation in Value and Momentum Premiums

AbstractWe find that the market’s recent cross-sectional dispersion in stock returns is positively related to the subsequent value book-to-market premium and negatively related to the subsequent momentum premium. The partial relation between return dispersion (RD) and the subsequent value and momentum premiums remains strong when controlling for macroeconomic state variables suggested by the literature. Our findings are consistent with recent theoretical insights and empirical evidence that suggest that the market’s RD may serve as a leading countercyclical state variable, that the value premium is countercyclical, and that the momentum premium is procyclical.

Information content and other characteristics of the daily cross-sectional dispersion in stock returns

We study the cross-sectional dispersion in daily stock returns, or daily return dispersion (RD). Our primary empirical contribution is to demonstrate that RD contains reliable incremental information about the future traditional volatility of both firm-level and portfolio-level returns. The relation between RD and future stock volatility is pervasive across time and across different industry portfolios, size-based portfolios, and beta-based portfolios. Further, our results suggest that RD contains more incremental information about the future volatility of firm-level stock returns than do lagged market-level return shocks. To further characterize RD and assist in interpretation, we also document how dispersion varies with stock turnover and macroeconomic news.

A note on the variability of inflation and the cross-sectional dispersion of stock returns

This paper documents a positive relationship between the variance of the inflation rate and the variance of cross-sectional common stock returns which is consistent with the imperfect information hypothesis. We also report that the relationship has changed over time.