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
This paper starts by successfully replicating all the main results in Kelly and Pruitt (2013) for the return on the marketâ€”and providing some evidence of market premium predictabilityâ€”based on their original empirical choices in the 1930â€“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 1926â€“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 1926â€“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)
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Persistent link: https://EconPapers.repec.org/RePEc:now:jnlcfr:104.00000116
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