Evaluating Firm-Level Expected-Return Proxies

Charles Lee, Eric C. So and Charles C. Y. Wang
Additional contact information
Eric C. So: MIT
Charles C. Y. Wang: Harvard University

Research Papers from Stanford University, Graduate School of Business

Abstract: We develop and implement a rigorous analytical framework for empirically evaluating the relative performance of firm-level expected-return proxies (ERPs). We show that superior proxies should closely track true expected returns both cross-sectionally and over time (that is, the proxies should exhibit lower measurement-error variances). We then compare five classes of ERPs nominated in recent studies to demonstrate how researchers can easily implement our two-dimensional evaluative framework. Our empirical analyses document a tradeoff between time-series and cross-sectional ERP performance, indicating the optimal choice of proxy may vary across research settings. Our results illustrate how researchers can use our framework to critically evaluate and compare a growing body of ERPs.

JEL-codes: G10 G11 G12 G14 M41 (search for similar items in EconPapers)
Date: 2014-09
New Economics Papers: this item is included in nep-bec, nep-ecm and nep-mfd
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:ecl:stabus:3188

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