36 Pages Posted: 19 Dec 2016 Last revised: 13 Jan 2017
Date Written: December 18, 2016
While a large literature on return predictability has shown a link between valuation levels and expected rates of returns, we document a robust link between valuation levels and the shape of the distribution of cumulative (up to 24 months) total returns. Return distributions become more asymmetric and negatively skewed when valuation levels are high. In contrast, they are roughly symmetric when valuation levels are low. These results shed some light on how equity prices regress back to their means conditional on valuation levels and have important practical implications for risk measurement and asset management.
Keywords: return predictability, valuation ratios, skewness
JEL Classification: G12, G17, C22
Suggested Citation: Suggested Citation
Giordani, Paolo and Halling, Michael, Up the Stairs, Down the Elevator: Valuation Ratios and Shape Predictability in the Distribution of Stock Returns (December 18, 2016). Swedish House of Finance Research Paper No. 17-5. Available at SSRN: https://ssrn.com/abstract=2887156
By Andrew Ang