Market expectations in the cross-section of present values

Bryan Kelly, Seth Pruitt

Research output: Contribution to journalArticle

69 Citations (Scopus)

Abstract

Returns and cash flow growth for the aggregate U.S. stock market are highly and robustly predictable. Using a single factor extracted from the cross-section of book-to-market ratios, we find an out-of-sample return forecasting R2 of 13% at the annual frequency (0.9% monthly). We document similar out-of-sample predictability for returns on value, size, momentum, and industry portfolios. We present a model linking aggregate market expectations to disaggregated valuation ratios in a latent factor system. Spreads in value portfolios' exposures to economic shocks are key to identifying predictability and are consistent with duration-based theories of the value premium.

Original languageEnglish (US)
Pages (from-to)1721-1756
Number of pages36
JournalJournal of Finance
Volume68
Issue number5
DOIs
StatePublished - Oct 2013
Externally publishedYes

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Cross section
Present value
Predictability
Latent factors
Factors
Value premium
Cash flow
Momentum
Industry
Economic shocks
Stock market
Book-to-market ratio

ASJC Scopus subject areas

  • Finance
  • Accounting
  • Economics and Econometrics

Cite this

Market expectations in the cross-section of present values. / Kelly, Bryan; Pruitt, Seth.

In: Journal of Finance, Vol. 68, No. 5, 10.2013, p. 1721-1756.

Research output: Contribution to journalArticle

Kelly, Bryan ; Pruitt, Seth. / Market expectations in the cross-section of present values. In: Journal of Finance. 2013 ; Vol. 68, No. 5. pp. 1721-1756.
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