Jiang, Danling (2008): Cross-Sectional Dispersion of Firm Valuations and Expected Stock Returns.
Download (445kB) | Preview
This paper develops two competing hypotheses for the relation between the cross-sectional standard deviation of logarithmic firm fundamental-to-price ratios (``dispersion'') and expected aggregate returns. In models with fully rational beliefs, greater dispersion indicates greater risk and higher expected aggregate returns. In models with investor overconfidence, greater dispersion indicates greater mispricing and lower expected aggregate returns. Consistent with the behavioral models, the results show that (1) measures of dispersion are negatively related to subsequent market excess returns, (2) this negative relation is more pronounced among riskier firms, and (3) dispersion is positively related to aggregate trading volume, idiosyncratic volatility, and investor sentiment, and increases after good past market performance.
|Item Type:||MPRA Paper|
|Original Title:||Cross-Sectional Dispersion of Firm Valuations and Expected Stock Returns|
|Keywords:||Return predictability, Dispersion, Overconfidence, Idiosyncratic volatility, Investor sentiment|
|Subjects:||G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency; Event Studies
G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates
|Depositing User:||Danling Jiang|
|Date Deposited:||18. Apr 2008 14:44|
|Last Modified:||20. Feb 2013 19:31|
Alpert, Murray, and Howard Raiffa, 1982, A Progress Report on the Training of probability Assessors, in Daniel Kahneman, Paul Slovic, and Amos Tversky, eds.: Judgement under Uncertainty: Heuristics and Biases (Cambridge University Press, Cambridge ).
Ang, Andrew, Robert J. Hodrick, Yuhang Xing, and Xiaoyan Zhang, 2006, The Cross-Section of Volatility and Expected Returns, Journal of Finance 61, 259-299.
Atkins, Allen B., and Edward A. Dyl, 1997, Market structure and reported trading volume: NASDAQ versus the NYSE, Journal of Financial Research 20, 291-304.
Baker, Malcolm, and Jeffrey Wurgler, 2006, Investor Sentiment and The Cross-Section of Stock Returns, Journal of Finance 61, 1645-1680.
Berk, Jonathan, 1995, A Critique of Size Related Anomalies, Review of Financial Studies 8, 275-286.
Berk, Jonathan B., Richard C. Green, and Vasant Naik, 1999, Optimal Investment, Growth Options, and Security Returns, Journal of Finance 54, 1553-1607.
Boudoukh, Jacob, Roni Michaely, Matthew Richardson, and Michael R. Roberts, 2007, On the Importance of Measuring Payout Yield: Implications for Empirical Asset Pricing, Journal of Finance 62, 877-915.
Brennan, Michael J., Ashley W. Wang, and Yihong Xia, 2004, Estimation and Test of a Simple Model of Intertemporal Capital Asset Pricing, Journal of Finance 59, 1743-1776.
Brennan, Michael J., and Yihong Xia, 2005, tay's as Good as cay, Finance Research Letters 2, 1-14.
Camerer, Colin, 1995, Individual Decision Making, in John H. Kagel, and Alvin E. Roth, eds.: The Handbook of Experimental Economics (Princeton University Press, Princeton, NJ ).
Campbell, John Y., Martin Lettau, Burton G. Malkiel, and Yexiao Xu, 2001, Have Individual Stocks Become More Volatile? An Empirical Exploration of Idiosyncratic Risk, The Journal of Finance 56, 1-43.
Campbell, John Y., and Robert J. Shiller, 1988, The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors, Review of Financial Studies 1, 195-228.
Campbell, John Y., and Samuel B. Thompson, 2007, Predicting Excess Stock Returns Out of Sample: Can Anything Beat the Historical Average?, Review of Financial Studies Forthcoming.
Campbell, John Y., and Tuomo Vuolteenaho, 2004, Bad Beta, Good Beta, American Economic Review 94, 1249-1275.
Carhart, Mark M., 1997, On Persistence in Mutual Fund Performance, Journal of Finance 52, 57-82.
Cochrane, John H., 2001, Asset Pricing. (Princeton University Press, Princeton and Oxford 41 William Stree, Princeton, New Jersey).
Cochrane, John H., 2007, The Dog That Did Not Bark: A Defense of Return Predictability, Review of Financial Studies forthcoming.
Cohen, Randolph B., Christopher K. Polk, and Tuomo Vuolteenaho, 2003, The Value Spread, Journal of Finance 58, 609-642.
Daniel, Kent, David Hirshleifer, and Avanidhar Subrahmanyam, 1998, Investor Psychology and Security Market Under- and Overreactions, Journal of Finance 53, 1839-1886.
Daniel, Kent, and Sheridan Titman, 1997, Evidence on the Characteristics of Cross Sectional Variation in Stock Returns, Journal of Finance 52, 1-33.
Daniel, Kent D., David Hirshleifer, and Avanidhar Subrahmanyam, 2001, Overconfidence, Arbitrage, and Equilibrium Asset Pricing, Journal of Finance 54, 921-965.
Daniel, Kent D., David Hirshleifer, and Avanidhar Subrahmanyam, 2005, Investor Psy-chology and Tests of Factor Pricing Models, Working Paper, UCLA, Northwestern University, and Ohio State University.
Einhorn, Hillel J., 1980, Overconfidence in Judgment, New Directions for Methodology of Social and Behavioral Science 4, 1-16.
Fama, Eugene F., and Kenneth R. French, 1988a, Dividend Yields and Expected Stock Returns, Journal of Financial Economics 22, 3-25.
Fama, Eugene F., and Kenneth R. French, 1992, The Cross-Section of Expected Stock Returns, Journal of Finance 47, 427-465.
Fama, Eugene F., and Kenneth R. French, 1993, Common Risk Factors in the Returns on Stocks and Bonds, Journal of Financial Economics 33, 3-56.
Fama, Eugene F., and Kenneth R. French, 1995, Size and Book-to-Market Factors in Earnings and Returns, Journal of Finance 50, 131-155.
Fama, Eugene F., and Kenneth R. French, 2004, New Lists: Fundamentals and Survival Rates, Journal of Financial Economics 73, 229-269.
Gervais, Simon, and Terrance Odean, 2001, Learning to be Overconfident, Review of Financial Studies 14, 1-27.
Gomes, Joao, Leonid Kogan, and Lu Zhang, 2003, Equilibrium Cross Section of Returns, Journal of Political Economy 111, 693-732.
Goyal, Amit, and Ivo Welch, 2007, A Comprehensive Look at the Empirical Performance of Equity Premium Prediction, Review of Financial Studies forthcoming.
Hong, Harrison, Jose Scheinkman, and Wei Xiong, 2006, Asset Float and Speculative Bubbles, Journal of Finance 61, 1073-1117.
Kothari, S.P., and Jay Shanken, 1997, Book-to-market, Dividend Yield, and Expected Market Returns: A Time-series Analysis, Journal of Financial Economics 44, 169-203.
Kumar, Alok, 2008, Hard-To-Value Stocks, Behavioral Biases, and Informed Trading, Journal of Financial and Quantitative Analysis forthcoming.
Kyle, Albert, and F. Albert Wang, 1997, Speculation Duopoly With Agreement to Disagree: Can Overconfidence Survive the Market Test?, Journal of Finance 52, 2073-2090.
Lamont, Owen, 1998, Earnings and Expected Returns, Journal of Finance 53, 1563-1587.
Lee, Charles M.C., James Myers, and Bhaskaran Swaminathan, 1999, What is the Intrinsic Value of the Dow?, Journal of Finance 54, 1693-1741.
Lettau, Martin, and Stijn Van Nieuwerburgh, 2007, Reconciling the Return Predictability Evidence, Review of Financial Studies forthcoming.
Lewellen, Jonathan, 1999, The Time-Series Relations among Expected Return, Risk, and Book-to-Market, Journal of Financial Economics 54, 5-43.
Lichtenstein, S., B. Fischhoff, and L.D. Phillips, 1982, Calibration of probabilities: The state of the art to 1980, in D. Kahneman, P. Slovic, and A. Tversky, eds.: Judgment under uncertainty: heuristics and biases (Cambridge University Press, Great Britain ).
Nelson, Charles R., and Myung J. Kim, 1993, Predictable Stock Returns: The Role of Small Sample Bias, Journal of Finance 48, 641-661.
Odean, Terrance, 1998, Volume, Volatility, Price and Profit When All Traders are Above Average, Journal of Finance 53, 1887-1934.
Polk, Christopher, Samuel Thompson, and Tuomo Vuolteenaho, 2006, Cross-Sectional Forecasts of the Equity Premium, Journal of Financial Economics 81, 101-141.
Pontiff, Jeffrey, and Lawrence D. Schall, 1998, Book-to-Market Ratios as Predictors of Market Returns, Journal of Financial Economics 49, 141-160.
Scheinkman, Jose A., and Wei Xiong, 2003, Overconfidence and Speculative Bubbles, Journal of Political Economy 111, 1183-1219.
Sharpe, William F., 1964, Capital Asset Prices: A Theory of Market Equilibrium Under Conditions of Risk, Journal of Finance 19, 425-442.
Stambaugh, Robert F., 1986, Biases in Regressions with Lagged Stochastic Regressors, CRSP Working Paper No. 156, University of Chicago, Graduate School of Business.
Stambaugh, Robert F., 1999, Predictive Regressions, Journal of Financial Economics 54, 375-421.
Statman, Meir, Steven Thorley, and Keith Vorkink, 2006, Investor Overconfidence and Trading Volume, Review of Financial Studies 19, 1531-1565.
Vuolteenaho, Tuomo, 2000, Understanding The Aggregate Book-to-Market Ratio and Its Implications to Current Equity-Premium Expectations, Working paper, Harvard University.
Zhang, X. Frank, 2006, Information Uncertainty and Stock Returns, Journal of Finance 61, 105-137.