Market Expectations in the Cross‐Section of Present Values

2013/05/13 by Bryan Kelly, Seth Pruitt · 2 citations
Economics, Econometrics and Finance · Mathematics · #Aggregate (composite) #Capital asset pricing model #Cash flow #Econometrics #Economics #Finance #Financial Markets and Investment Strategies #Financial economics #Geography #Market Dynamics and Volatility #Mathematics #Momentum (technical analysis) #Monetary Policy and Economic Impact #Predictability #Sample (material) #Statistics #Stock (firearms) #Stock market #Valuation (finance) #Value premium

paper · doi:10.1111/jofi.12060

openalex publication_date 2013/05/13 · openalex created_date 2025/10/10 · openalex updated_date 2026/08/02

Abstract

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 R 2 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.

Citations

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• Forecasting: theory and practice
• Partial least squares regression [wikipedia]

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