Expected Returns, Yield Spreads, and Asset Pricing Tests

Abstract:     
We construct firm-specific measures of expected equity returns using corporate bond yields, and replace standard ex-post average returns with our expected-return measures in asset pricing tests. We find that the market beta is significantly priced in the cross-section of expected returns. The expected size and value premia are positive and countercyclical, but there is no evidence of positive expected momentum profits.

Number of Pages in PDF File: 52

Keywords: Expected returns, risk factors, systematic risk, yield spreads

JEL Classification: G12, E44

Accepted Paper Series