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

Published online by Cambridge University Press:  02 July 2010

Chris Stivers  and
Licheng Sun
Chris Stivers
Affiliation:
College of Business, University of Louisville, 2301 S. 3rd St., Louisville, KY 40292. [email protected]
Licheng Sun
Affiliation:
College of Business, Old Dominion University, Norfolk, VA 23529. [email protected]
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Abstract

We 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.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 45 , Issue 4 , August 2010 , pp. 987 - 1014
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2010

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