Market expectations in the cross-section of present values

Bryan Kelly, Seth Pruitt

Research output: Contribution to journalArticle

96 Scopus citations

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 1 2013
Externally publishedYes

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

Fingerprint Dive into the research topics of 'Market expectations in the cross-section of present values'. Together they form a unique fingerprint.

  • Cite this