Singapore management university institutional knowledge at. Eisfeldty northwestern university dimitris papanikolaouz northwestern university april 2010 abstract this paper studies the unique risk characteristics of organization capital. Accounting data, market values, and the cross section of. Expectations and the crosssection of stock returns rafael. The crosssection of expected stock returns jonathan lewellen, dartmouth college and nber abstract this paper studies the crosssectional properties of return forecasts derived from famamacbeth regressions. Crosssection of expected returns and extreme returns. The cross section of cashflow volatility and expected stock. Ep is likely to be higher prices are lower relative to earnings for stocks with higher risks and expected returns, whatever the unnamed sources of risk.
The role of investor attention and risk preferences. Cross section of expected returns and extreme returns. As a result, both shareholders and management have a claim on the. I am grateful to christopher malloy and andrew jackson for thoughtful comments and suggestions. Cross section of volatility and expected returns 261 of assets that may have different exposures to aggregate volatility and hence different average returns. A model of crosssection of equity returns and firm dynamics. Forecast dispersion and the crosssection of expected returns timothy c. The history of the cross section of stock returns juhani t. These forecasts mimic how an investor could, in real time, combine many firm characteristics to obtain a composite estimate of a stocks expected return.
Which characteristics provide incremental information for expected returns. Competition, productivity, organization and the cross section of expectedreturns robertnovymarxz universityof chicago and nber this draft. Crash sensitivity and the crosssection of expected stock. The crosssection of volatility and expected returns. This paper studies the crosssectional properties of return forecasts derived from. Crash sensitivity and the crosssection of expected stock returns abstract this paper examines whether investors receive compensation for holding crashsensitive stocks.
Section 1 describes the database used in this study. Expectations and the cross section of stock returns 1719. We construct a stock measure of organization capital based on readily available. If the volatility of the market return is a systematic risk. Abstract two easily measured variables, size and book. The securities exchange act of 1934 was enacted to ensure the flow of accurate and.
Eisfeldty northwestern university dimitris papanikolaouz northwestern university september 2009 abstract this paper studies the unique risk characteristics of organization capital. The cross section of expected stock returns 429 also possible, however, that beme just captures the unraveling regression toward the mean of irrational market whims about the prospects of firms. Given that so many papers have attempted to explain the same crosssection of expected returns, statistical inference should not be based on a single test perspective. Earnings, retained earnings, and booktomarket in the cross section of expected returns abstract we delve into what causes the relation between booktomarket and the cross section of stock returns. Thus, they conclude that beta is neither a single relevant risk measure nor a. We want to determine if the volatility of the market is a priced risk factor and estimate the price of aggregate volatility risk.
If aggregate volatility is a risk factor that is orthogonal to existing risk factors, the sensitivity of stocks. Organization capital and the crosssection of expected returns andrea l. The resulting predictor can reliably describe the cross section of returns for at least ve years the lower bound of the typical useful life for corporate investments. Given this extensive data mining, it does not make sense to use the usual criteria for establishing. Market frictions, price delay, and the crosssection of.
Given this extensive data mining, it does not make any economic or statistical sense to use the usual significance criteria for a newly discovered factor, e. We extend and enrich the finding of a recent paper by bali, cakici, and whitelaw. Portfolio inefficiency and the crosssection of expected returns abstract the capital asset pricing model implies that i the market portfolio is efficient and ii expected returns are linearly related to betas. The crosssection of expected stock returns 429 also possible, however, that beme just captures the unraveling regression toward the mean of irrational market whims about the prospects of firms. We provide a systematic study of how stochastic volatility is priced in the crosssection of expected stock returns. The cross section of expected stock returns tuck school of. Using the cross section of stock returns also allows us to easily control for a battery of cross sectional effects, like the size and value factors of fama and french 1993, the momentum effect of jegadeesh and titman 1993, and the effect of liquidity risk documented by pastor and stambaugh 2003. The crosssection of expected returns in the secondary. But a recent paper by ang, hodrick, xing, and zhang 2006, ahxz hereafter finds that, in the cross section of. This paper explores the crosssectional variation of expected returns for a large cross section of industry and sizebooktomarket portfolios. Outofsample forecasts from fm regressions provide a simple, yet surprisingly effective, way to form a composite trading strategy going long highexpectedreturn stocks. Earnings, retained earnings, and booktomarket in the cross section of expected returns. Section 4 examines the cross sectional relation between downside risk and expected returns of corporate bonds.
However, since that time, hundreds of papers have tried to explain the cross. We then derive implications for the crosssection of expected returns, and. The crosssection of expected stock returns eugene f. Earnings, retained earnings, and booktomarket in the cross. Hundreds of papers and factors attempt to explain the crosssection of expected returns. Forecast dispersion and the cross section of expected returns timothy c. Section 2 examines the empirical relationships between idiosyncratic risk, liquidity and stock returns. Competition, productivity, organization and the cross. The objective of this study is to investigate the crosssection of stock returns in the.
Crash sensitivity and the crosssection of expected stock returns. Green the editor and to the referee for valuable expositional advice. Market frictions, price delay, and the crosssection of expected returns abstract we parsimoniously characterize the severity of market frictions a. What is cross section in cross section of stock return. A new factor model consisting of the market factor, an investment factor, and a returnonequity factor is a good start to understanding the crosssection of expected stock returns. But a recent paper by ang, hodrick, xing, and zhang 2006, ahxz hereafter finds that, in the crosssection of.
Crosssection of volatility and expected returns 261 of assets that may have different exposures to aggregate volatility and hence different average returns. These forecasts mimic how an investor could, in real time, combine many firm characteristics to get a composite estimate of a stocks expected return. Consumption risk and the cross section of expected returns. June, 2009 abstract this paper studies a model of industry oligopoly, in which. Eisfeldty ucla dimitris papanikolaouz northwestern university july 2011 abstract organization capital is a production factor that is embodied in the rms key talent and has an e ciency that is rm speci c. Pdf this paper explores the ability of the capital asset pricing model, as well as. Hundreds of papers and factors attempt to explain the cross section of expected returns.
Our thesis is that the components of the booktomarket ratios numerator the accounting book value of equity contain different information about the cross section of stock returns and that differences in their informativeness can shed light on the source and interpretation of booktomarkets predictive ability for the cross section of. This paper studies the properties and predictive ability of return forecasts from famamacbeth crosssectional regressions. Section 4 examines the crosssectional relation between downside risk and expected returns of corporate bonds. My approach exploits the fact that the booktomarket ratio hereafter bm re ects both longterm expected returns and longterm expected pro tabilit. We employ mixed data sampling midas to estimate a portfolios conditional beta with the market and with alternative risk factors and innovations to wellknown macroeconomic variables. Papers are invited for submission on this broad theme, including. Competition, productivity, organization and the cross section of. This table lists the return anomalies examined in this study, the paper that first used each variable to predict the cross section of returns, and the sample period of returns used in that study. Two easily measured variables, size and booktomarket equity, combine to capture the crosssectional variation in average stock returns associated with market. What are the key factors explaining crosssectional variation in. Among them are levy 1978, merton 1987, and malkiel and xu 2002. The cross section of cashflow volatility and expected. Many do not view these implications as separate, since either implies the other, but we.
Earnings, retained earnings, and booktomarket in the. Parker princeton university and national bureau of economic research christian julliard princeton university this paper evaluates the central insight of the consumption capital asset pricing model that an assets expected return is determined by its equilibrium risk to. Crash sensitivity and the cross section of expected stock returns abstract this paper examines whether investors receive compensation for holding crashsensitive stocks. Our goal is to provide guidance as to the appropriate significance level using a multiple testing framework. A true conditional multifactor representation of expected returns in the cross. Expectations and the crosssection of stock returns. The cross section of expected returns in the secondary corporate loan market mehdi beyhaghiy sina ehsaniz june 1, 2015 abstract we examine the pricing of characteristics and betas in the cross section of expected corporate loan returns. Underdiversified investors demand a return compensation for bearing idiosyncratic risk.
The cross section of expected stock returns by jonathan. Common risk factors in the crosssection of corporate bond. A model of crosssection of equity returns and firm dynamics prelimary1 hengjie ai and dana kiku november, 2007 abstract we put forward a general equilibrium model that links the crosssection variation of expected returns to rmslife cycle dynamics. After fama and frenchs study, many articles have addressed the relatively low explanatory power of beta in the crosssection of expected return. French abstract two easily measured variables, size and booktomarket equity, combine to capture the crosssectional variation in average stock returns associated with market 3, size, leverage, booktomarket equity, and earningsprice ratios.
How average returns change across different stock or portfolios. Hundreds of papers and hundreds of factors attempt to explain the cross section of expected returns. The crosssection of expected returns in the secondary corporate loan market mehdi beyhaghiy sina ehsaniz june 1, 2015 abstract we examine the pricing of characteristics and betas in the crosssection of expected corporate loan returns. An equilibrium perspective abstract this paper proposes an intertemporal asset pricing model that resolves the negative crosssectional relations between expected stock return and dispersion, idiosyncratic volatility iv, and credit risk. Expectations and the crosssection of stock returns 1719. Ball 1978 argues that ep is a catchall proxy for unnamed factors in expected returns. What are the key factors explaining crosssectional variation in expected returns. Portfolio inefficiency and the crosssection of expected. Thus, they conclude that beta is neither a single relevant risk measure nor a subset of. Section 3 analyzes each factors out of sample performance. Many option studies have estimated a negative price of risk for market. The efficiency of the market portfolio implies that a expected returns on. The conditional capm and the crosssection of expected. Consumption risk and the cross section of expected returns jonathan a.
We examine crosssectional anomalies in stock returns using handcollected accounting data extending back to the start of the 20th century. It is this unknown risk factor that we have in mind when we classify particular. So intuitively, if you study the cross section of stock returns. Information quality and the crosssection of expected returns. We merge them with the crsp database to obtain returns. Forecast dispersion and the crosssection of expected returns. The crosssection of expected stock returns summary. The conditional capm and the cross sectionof expected returns ravi jagannathan and zhenyuwang abstract most empirical studies of the static capm assume that betas remain constant over time and that the return on the valueweighted portfolio of all stocks is a proxy for the return on aggregate wealth. Linnainmaa3,4 and valeri nikolaev 1university of chicago booth school of business, united states. These forecasts mimic how an investor could, in real time, combine many rm characteristics to obtain a composite estimate of a stocks. This paper studies the cross sectional properties of return forecasts derived from famamacbeth regressions. Two easily measured variables, size me and booktomarket equity. We capture the crash sensitivity of stocks by their lower tail dependence ltd with the market based on copulas. The crosssection of expected stock returns 3 available at the time i.
Accounting data, market values, and expected returns worldwide 2 nonlinear equations by numerical methods that may or may not converge, or that may converge to multiple solutions, and, perhaps most saliently, the lack of evidence that iccs, in the cross section, line up well with expected returns easton and monahan, 2005. Eisfeldt and dimitris papanikolaou abstract organization capital is a production factor that is embodied in the rms key talent and has an e ciency that is rm speci c. These forecasts mimic how an investor could, in real time, combine many firm characteristics to obtain a composite estimate of a stockas expected return. Organization capital and the crosssection of expected returns.
The conditional capm and the crosssectionof expected returns ravi jagannathan and zhenyuwang abstract most empirical studies of the static capm assume that betas remain constant over time and that the return on the valueweighted portfolio of all stocks is a proxy for the return on aggregate wealth. Whatever the underlying economic causes, our main result is straightfor ward. Second, the ratio of booktomarket equity and size are found to be the most significant variables that can account for the cross section of expected stock returns. The cross section of expected returns with midas betas. Organization capital and the cross section of expected returns andrea l. Second, the ratio of booktomarket equity and size are found to be the most significant variables that can account for the crosssection of expected stock returns. The cross section of expected stock returns 3 available at the time i. Hence, both shareholders and key talent have a claim to its cash ows. Hundreds of papers and hundreds of factors attempt to explain the crosssection of expected returns. An asterisk denotes an anomaly that is defined differently from the initial study due to the lack of either quarterly data or some data items.
Low r square in the cross section of expected returns. This table lists the return anomalies examined in this study, the paper that first used each variable to predict the crosssection of returns, and the sample period of returns used in that study. There are several advantages of using a cross section of returns on stocks, rather than a cross section of options on the market, to estimate the price of risk of aggregate volatility. The crosssection of expected stock returns summary vu. School of accounting and finance, and center for advanced studies in finance, university of waterloo, waterloo, canada on n2l 3g1. Book value of equity consists of two main components that we expect contain di er. This paper studies the crosssectional properties of return forecasts derived from famamacbeth regressions. Pdf the crosssection of expected stock returns semantic scholar. Eisfeldt northwestern university dimitris papanikolaouy northwestern university november 2008 abstract this paper studies the unique risk characteristics of organization capital. Section of expected stock returns wiley online library. Two easily measured variables, size and booktomarket equity, combine to capture the crosssectional variation in average stock returns associated with market 3. A new factor model consisting of the market factor, an investment factor, and a returnonequity factor is a good start to understanding the cross section of expected stock returns. First, we crosssectionally estimate a price of risk for aggregate market volatility.
First, using the cross section of returns allows us to create a useful hedging, or mimicking factor portfolio for aggregate volatility risk. Using a stock measure of organization capital based on readily available ac. Out of sample forecasts from fm regressions provide a simple, yet surprisingly effective, way to form a composite trading strategy going long high expected return stocks. The crosssection of expected stock returns critical finance. Earnings, retained earnings, and booktomarket in the cross section of expected returns ray bally 1, joseph gerakos2, juhani t. However, since that time, hundreds of papers have tried to explain the crosssection of expected returns. Roberts june 2017 draft abstract using data spanning the 20th century, we show that the majority of accountingbased return anomalies, including investment and pro tability, are most likely an artifact of data snooping. The growth rate in sales presented in the article is the geometric average of the com pounded annual growth rates.
47 1014 659 1612 1017 1532 545 996 49 245 852 1653 865 747 664 1569 471 143 1584 678 414 507 1617 985 1097 1180 17 914 1527 857 1410 763 1239 1067 310 1008 1023 1393 1348 861 622 987