The Cross Section Of Expected Stock Returns

The cross section of average returns on u s.

The cross section of expected stock returns. Stocks in tests that also include size and market f. The time series means of the monthly regression slopes then provide standard tests of whether different explanatory variables are on average priced. The cross sectional relationship between firm specific characteristics and stock returns has attracted considerable attention and previous studies identify several important factors in explaining stock returns in various stock markets around the world.

E p 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. 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. E p is likely to be higher prices are lower relative to earnings for stocks with higher risks and expected returns.

The cross section of expected stock returns 3 available at the time i e without knowing how strong the predictive power of each characteristic would turn out to be. Moreover when the tests allow for variation in β that is unrelated to size the relation between market β and average return is flat even when β is the only explanatory variable. Each month the cross section of returns on stocks is regressed on variables hypothesized to explain expected returns.

Stocks in tests that also include size and market p. Ball 1978 argues that e p is a catch all proxy for unnamed factors in expected returns.