The Cross Section of Expected Stock Returns

Forthcoming in Critical Finance Review

Tuck School of Business Working Paper No. 2511246

41 Pages Posted: 18 Oct 2014

See all articles by Jonathan Lewellen

Jonathan Lewellen

Dartmouth College - Tuck School of Business; National Bureau of Economic Research (NBER)

Date Written: August 22, 2014

Abstract

This paper studies the cross-sectional properties of return forecasts derived from Fama-MacBeth regressions. These forecasts mimic how an investor could, in real time, combine many firm characteristics to obtain a composite estimate of a stock’s expected return. Empirically, the forecasts vary substantially across stocks and have strong predictive power for actual returns. For example, using ten-year rolling estimates of Fama-MacBeth slopes and a cross-sectional model with 15 firm characteristics (all based on low-frequency data), the expected-return estimates have a cross-sectional standard deviation of 0.87% monthly and a predictive slope for future monthly returns of 0.74, with a standard error of 0.07.

Keywords: Expected stock returns, predictability, out-of-sample

Suggested Citation

Lewellen, Jonathan W., The Cross Section of Expected Stock Returns (August 22, 2014). Forthcoming in Critical Finance Review; Tuck School of Business Working Paper No. 2511246. Available at SSRN: https://ssrn.com/abstract=2511246 or http://dx.doi.org/10.2139/ssrn.2511246

Jonathan W. Lewellen (Contact Author)

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States
603-646-8650 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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