The cross section of expected holding period returns and their dynamics
Subtitle: a present value approach
By: Matthew R. Lyle, Charles C.Y. Wang
Contributors: Wang, Charles C.Y, author; Harvard Business School
Series: Working paper / Harvard Business School -- 13-050; Working paper (Harvard Business School) -- 13-050.
Publisher: Harvard Business School
Published: 2014
Place of publication: Boston]
Language: eng
Number of pages: 55
Work titles: Expected returns dynamics implied by firm fundamentals
Description: We provide a tractable model of firm-level expected holding period returns using two firm fundamentals--book-to-market ratio and ROE--and study the cross-sectional properties of the model-implied expected returns. We find that: 1) firm level expected returns and expected profitability are time-varying, but highly persistent; 2) forecasts of holding period returns strongly predict the cross section of future returns up to three years ahead. We document a highly significant predictive pooled regression slope for future quarterly returns of 0.86, whereas the popular factor-based expected return models have either an insignificant or a significantly negative association with future returns. In supplemental analyses, we show that these forecasts are also informative of the time-series variation in aggregate conditions: 1) for a representative firm, the slope of the conditional expected return curve is more positive in good times, when expected short-run returns are relatively low; 2) the model-implied forecaster of aggregate returns exhibits modest predictive ability. Collectively, we provide a simple, theoretically-motivated, and practically useful approach to estimating multi-period ahead expected returns.
Notes: "November 2012. (Revised March 2013, September 2013, May 2014.)"--Publisher's Web site.

Revision of Expected returns dynamics implied by firm fundamentals.

Includes bibliographical references (pages 36-39).