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Dissecting Market Expectations in the Cross-Section of Book-to-Market Ratios

Thiago de Oliveira Souza

Critical Finance Review, 2022, vol. 11, issue 2, 361-373

Abstract: This paper starts by successfully replicating all the main results in Kelly and Pruitt (2013) for the return on the market—and providing some evidence of market premium predictability—based on their original empirical choices in the 1930–2010 sample. However, the evidence of market premium predictability, in particular, essentially disappears by making any one of the following changes: (i) updating the sample to June 1926–December 2019; (ii) not taking logs of the book-to-markets used as regressors; (iii) not dividing book-to-markets by their time-series standard deviations; or (iv) not taking one extra book-to-market lag (for monthly forecasts). In summary, I find no evidence that the procedure generates a valid forecasting model of market premiums with persistently positive out-of-sample R2 in the full 1926–2019 sample, especially since the Oil Shock (or early 2000).

Keywords: Predictability; Out-of-sample; Equity premium; Disaggregated book-to-markets (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 (search for similar items in EconPapers)
Date: 2022
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