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| Author: | Pollet, J. M. Wilson, M. |
| Title: | Average correlation and stock market returns |
| Journal: | Journal of Financial Economics
2010 : JUN, VOL 96:3, p. 346-380 |
| Index terms: | stock returns risk financial models |
| Language: | eng |
| Abstract: | The complexity of evaluating the relationship between stock market risk and returns causes difficulties in asset pricing models. If Roll critique holds, changes in aggregate risk and stock market returns can be only weakly to stock market variance. Higher correlation between stocks, however, may indicate higher aggregate risk. The purpose of this article is to develop a model that demonstrates how the daily average correlation between stock returns predicts quarterly stock market returns. It is also shown that average correlation stock market risk changes depict changes in the average variance of individual stocks, and is negatively related to future stock market excess returns. |
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