Inferring Aggregate Market Expectations from the Cross-Section of Stock Prices

Journal of Financial and Quantitative Analysis, Forthcoming

70 Pages Posted: 25 Jul 2017 Last revised: 20 Oct 2022

See all articles by Turan G. Bali

Turan G. Bali

Georgetown University - McDonough School of Business

Craig Nichols

Syracuse University

David Weinbaum

Syracuse University

Date Written: October 19, 2022

Abstract

We introduce a new approach to estimating long-term aggregate discount rates using the cross-section of earnings and book values to explain current stock prices and extract expected market returns. The proposed discount rate measure is countercyclical. Shocks to it account for nearly half of historical market return variation; in contrast, shocks to other discount rate measures account for no more than two percent. It dominates other measures in explaining time-series variation in returns on duration-sorted portfolios and delivers out-of-sample predictability that exceeds that afforded by other expected return measures and predictive variables. It also performs well in international equity markets.

Keywords: expected market returns; discount rate news; equity duration

JEL Classification: G10, G17

Suggested Citation

Bali, Turan G. and Nichols, Craig and Weinbaum, David, Inferring Aggregate Market Expectations from the Cross-Section of Stock Prices (October 19, 2022). Journal of Financial and Quantitative Analysis, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3006634 or http://dx.doi.org/10.2139/ssrn.3006634

Turan G. Bali

Georgetown University - McDonough School of Business ( email )

3700 O Street, NW
Washington, DC 20057
United States
(202) 687-5388 (Phone)
(202) 687-4031 (Fax)

HOME PAGE: https://sites.google.com/a/georgetown.edu/turan-bali

Craig Nichols

Syracuse University ( email )

900 S. Crouse Avenue
Syracuse, NY 13244-2130
United States

David Weinbaum (Contact Author)

Syracuse University ( email )

Syracuse, NY
United States

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