Faculty Scholarship 1994 - Present

Sector Dispersion and Stock Market Predictability

Sector dispersion is the variation of returns between stock sector indexes over time. In practice, very few investors actually trade all stocks, with the exception of total (or broad) market index funds. As all market sectors are not invested in equally, a disparity of valuable information among sectors may exist. A recession or economic expansion may result in a rising or falling stock market with different relative effects among sector index returns. Although sector dispersion is used by some market analysts to predict market volatility and future returns (e.g., Sesit [2004]), it has not been empirically investigated in the literature. The purpose of this study is to investigate whether the dispersion between sector returns can predict changes in sector index returns, S&P500 index returns, and market volatility.