An Empirical Study on Predictability of Return Dispersion

Kim, Hyunsik; Kim, Hyeongjun; Cho, Hoon

Korean Journal of Financial Studies 2016;45(2):285-316.
Published online April 30, 2016.

Hyunsik Kim, Hyeongjun Kim, Hoon Cho

수익률 횡단면변동성(Return Dispersion)의 시장예측력에 관한 실증연구

김현식, 김형준, 조훈

Abstract

This paper tests whether stock return dispersion (henceforth RD) provides useful information on market return predictability and future volatility in Korea. Our result shows that RD can be used as forecasting variables of market return and volatility in four aspects. Firstly, RD has a significant predictability on market return and volatility. RD consistently shows negative correlation to market return and it has long-term (over 6 months) predictability. Secondly, comparing with the simple stock variance (henceforth SVAR), RD has better performance than SVAR when predicting market return. SVAR does not have significant predictability on market return in Korea and it only have shortterm predictability on a market volatility. Thirdly, RD has greater forecasting power for growth stock portfolio, compared to value stock portfolio. However, SVAR does not show any significantly different predictability between portfolios. Fourthly, the forecasting power of RD varies with time periods. Periods before the Asian financial crisis in 1997 and after international financial crisis in 2007 shows significant predictability of RD. RD still have its forecasting power until a recent date.

Key Words: 다중예측회귀모형,단순주식변동성,수익률 횡단면변동성,주식수익률,한국주식시장,Korean Stock Market,Market Return,Predictability,RD,Return Dispersion,Volatility