Equity return dispersion and stock market volatility : evidence from multivariate linear and nonlinear causality tests

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Authors

Demirer, Riza
Gupta, Rangan
Lv, Zhihui
Wong, Wing-Keung

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Journal ISSN

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Publisher

MDPI

Abstract

We employ bivariate and multivariate nonlinear causality tests to document causality from equity return dispersion to stock market volatility and excess returns, even after controlling for the state of the economy. Expansionary (contractionary) market states are associated with a low (high) level of equity return dispersion, indicating asymmetries in the relationship between return dispersion and economic conditions. Our findings indicate that both return dispersion and business conditions are valid joint forecasters of stock market volatility and excess returns and that return dispersion possesses incremental information regarding future stock return dynamics beyond that which can be explained by the state of the economy.

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Keywords

Equity return dispersion, Stock market volatility, Business cycle, Multivariate causality

Sustainable Development Goals

Citation

Demirer, R., Gupta, R., Lv, Z. et al. 2019,'Equity return dispersion and stock market volatility : evidence from multivariate linear and nonlinear causality tests', Sustainability, vol. 11, no. 2, a351, pp. 1-15.