Equity Return Dispersion and Stock Market Volatility: Evidence from Multivariate Linear and Nonlinear Causality Tests

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.

The Three Musketeers Relationships between Hong Kong, Shanghai and Shenzhen Before and After Shanghai–Hong Kong Stock Connect

“…It is suggested here that This paper studies sustainability of financial integration among Shenzhen, Shanghai, and Hong Kong stock markets. An extension of our paper could study sustainability of other aspects of financial markets, for example, sustainability in warrant markets [48], sustainability in REITs [49], sustainability in equity return dispersion and stock market volatility [50], sustainability in herding behaviour [51], sustainability in portfolio selection [52], and sustainability in credit risk [53]. This paper studies sustainability of financial integration among Shenzhen, Shanghai, and Hong Kong stock markets.…”

Does Herding Bias Drive the Firm Value? Evidence from the Chinese Equity Market

“…Chinese, Taiwanese and South Korean stock markets also reveal herding behavior [15][16][17][18]. In the Chinese equity market, Demirer and Kutan [19] empirically analyze the behavior of return dispersions during periods of unusually large upward and downward changes in the market index of both the SSE and SZSE, and conclude that the Chinese Market is free from herding bias, and a similar approach is used by Demirer et al [20]. Conversely, Tan et al [21] explore the evidence of herding bias at the SSE and the SZSE, the A-share and B-share markets.…”

The predictability of stock market volatility in emerging economies: Relative roles of local, regional, and global business cycles

“…This argument has been recently empirically supported for the United States (US) and other developed stock markets (Canada, Japan and the United Kingdom (UK)) by Choudhry et al (2016) and Demirer et al (2019) based on tests of causality. In the case of emerging markets, however, several recent studies including Nier et al (2014) and Miranda-Agrippino and Rey (2019) argue the presence of a global financial cycle to drive asset prices in global markets, partially driven by the monetary policy decisions by the U.S. Fed (Bruno and Shin (2018), Passari and Rey (2015), Rey (2018)), while Anaya et al (2017) argues that the U.S Fed monetary policy serves as a significant driver of financial and economic conditions in emerging economies.…”