The Dispersion of Stock Returns

Howard Zhang

Cross-sectional volatility (CSV) measures the opportunity in stock selection as defined by the dispersion in stock returns. We used MSCI Equity Factor Models to determine how much of the CSV has been explained by systematic factors over time in various market regions.

The left chart shows the total CSV and the contributions from systematic factors over a trailing 12-month moving average. When total CSV was high, systematic factors have tended to explain a larger fraction of it than when CSV was relatively low. In the right chart, we further decompose the factor CSV into the factor groups of styles, industries and countries. In Asia-Pacific ex-Japan and emerging markets, country factors have made larger contributions to factor CSV than in other regions. Source: Monthly data from Barra Global Total Market Equity Model for Long-Term Investors, Barra U.S. Total Market Equity Model for Long-Term Investors, Barra Europe Total Market Equity Model for Long-Term Investors, Barra Japan Equity Model, Barra Asia Pacific Equity Model and Barra Emerging Market Model for each corresponding region. Learn more about MSCI Equity Factor Models here.