The Second Moment Matters! Cross-Sectional Dispersion of Firm Valuations and Expected Stock Returns PDF Download

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The Second Moment Matters! Cross-Sectional Dispersion of Firm Valuations and Expected Stock Returns

The Second Moment Matters! Cross-Sectional Dispersion of Firm Valuations and Expected Stock Returns PDF Author: Danling Jiang
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Languages : en
Pages : 55

Book Description
Behavioral theories predict that firm valuation dispersion in the cross section (ldquo;dispersionrdquo;) measures aggregate overpricing caused by investor overconfidence and should be negatively related to expected aggregate returns. This paper develops and tests these hypotheses. Consistent with the model predictions, I find that measures of dispersion are positively related to aggregate valuations, trading volume, idiosyncratic volatility, past market returns, and current and future investor sentiment indexes. Dispersion is a strong negative predictor of subsequent shortand long-term market excess returns. Market beta is positively related to stock returns when the beginning-of-period dispersion is low and this relationship reverses when initial dispersion is high. A simple forecast model based on dispersion significantly outperforms a naive model based on historical equity premium in out-of-sample tests and the predictability is stronger in economic downturns.
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