Is the Value Spread a Good Predictor of Stock Returns? UK Evidence

Maria Michou

Journal of Business Finance & Accounting, 2009, vol. 36, issue 7‐8, 925-950

Abstract: Abstract: This paper explores the predictive ability of the value spread in the UK. I replicate the US analysis of Liu and Zhang (2007) using UK data. In addition, I extend their work by exploring the predictive ability of the book‐to‐market, market‐to‐book and value spread on other size and value investment strategies, namely: large‐caps only; small‐caps minus large‐caps (SML); value stocks only; growth stocks only; value stocks minus growth stocks (VMG) and a market portfolio that includes all stocks. The results are consistent with Liu and Zhang (2007) on the value spread. The value spread shows no predictive power for portfolio returns. Therefore, I show that the predictive power of book‐to‐market and market‐to‐book spreads depend on the portfolio formation strategies and the relative proportion of small‐cap, large‐cap, value and growth stocks in the portfolio.

Date: 2009
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https://doi.org/10.1111/j.1468-5957.2009.02148.x

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