The conditional relation between dispersion and return

Abstract

Abstract The main goal of this paper is to examine the conditional pricing effect of return dispersion on the cross section of returns. We observe a systematic conditional relation between dispersion and return even after controlling for market, size and book‐to‐market factors. However, we find that return dispersion risk is asymmetrically priced with a significantly positive premium observed during periods of large market gains only. The findings are found to be robust to alternative conditional specifications of market returns, suggesting asymmetric pricing effect of the return dispersion factor. We provide alternative explanations for the systematic risk captured by the return dispersion factor and discuss implications for portfolio management and corporate decisions.