Conditioned Effect Pricing of Return Dispersion

This paper is aimed to test conditioned and unconditioned effect pricing of return dispersion or in other words, investigate the conditional relationship between return dispersion and cross-section stock return in different market conditions including non-conditioned, up and down and extreme up and down. A sample composed of 144 firms listed in Tehran Stock Exchange (TSE) is examined for 1381 to 1392. Fama-MacBeth approach is used to investigate explanatory power of return dispersion. The results suggest that although the addition of returns dispersion to Fama and French three-factor model is leading to an increased explanatory power of the model, this factor is not able to explain cross section return variation. The recent finding is true for up, down and extreme market conditions. So, conditioned and unconditioned effect of return dispersion is not confirmed in TSE. However, beta effect are positive and significant in unconditioned and up markets and is negative and significant in down market. Also, book to market effect is invers and significant in up and extreme up market conditions.