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 language | English (US) |
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Pages (from-to) | 1721-1756 |
Number of pages | 36 |
Journal | Journal of Finance |
Volume | 68 |
Issue number | 5 |
DOIs | |
State | Published - Oct 2013 |
Externally published | Yes |
ASJC Scopus subject areas
- Accounting
- Finance
- Economics and Econometrics