The Cross-section of Expected Stock Returns

Jonathan Lewellen

Critical Finance Review, 2015, vol. 4, issue 1, 1-44

Abstract: This paper studies the cross-sectional properties of return forecasts derived from Fama-MacBeth regressions. These forecasts mimic how an investor could, in real time, combine many firm characteristics to obtain a composite estimate of a stock’s expected return. Empirically, the forecasts vary substantially across stocks and have strong predictive power for actual returns. For example, using ten-year rolling estimates of Fama- MacBeth slopes and a cross-sectional model with 15 firm characteristics (all based on low-frequency data), the expected-return estimates have a cross-sectional standard deviation of 0.87% monthly and a predictive slope for future monthly returns of 0.74, with a standard error of 0.07.

Keywords: Cross-sectional Asset Pricing; CAPM; Return Forecasting (search for similar items in EconPapers)
JEL-codes: G11 G12 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (73)

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Persistent link: https://EconPapers.repec.org/RePEc:now:jnlcfr:104.00000024

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