Expected returns and business conditions: a commentary on Fama and French

Angela Black

Applied Financial Economics, 2000, vol. 10, issue 4, 389-400

Abstract: Fama and French (1989) identify two useful variables for forecasting expected asset returns: the default and term spread. Jensen et al. (1996) show that the ability of default and term spreads to forecast expected returns is dependent upon the monetary environment. Motivated by the theoretical underpinnings of portfolio choice theory this paper uses a different measure of default and term premia. Using quarterly and monthly expected return data on four stock and one bond portfolio the results indicate that default and term premia constructed as the relative difference in returns possess a forecasting ability that is not dependent on the monetary environment. In addition, this alternative measure appears to be superior at forecasting expected returns than the more traditional default and term spread.

Date: 2000
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DOI: 10.1080/09603100050031516

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