Using Cashflow and Value Spreads to Forecast Long/Short Factor Returns

34 Pages Posted: 5 Nov 2018

See all articles by Yiqing Dai

Yiqing Dai

University of Adelaide

Tariq H. Haque

University of Adelaide; Financial Research Network (FIRN)

Ralf Zurbruegg

University of Adelaide; Financial Research Network (FIRN)

Date Written: September 19, 2018

Abstract

We show the value of adding cashflow spreads to value spreads to forecast long/short factor returns. These spreads, namely the profitability and investment spreads, have significant forecasting power for a number of factors. Including cashflow spreads also increases the predictive power of the value spread since it is a noisy measure of expected factor returns when used alone. Our results hold after controlling for macroeconomic variables and in out-of-sample tests. We also combine the value spread with the profitability and investment spreads to create a parsimonious measure, the composite characteristic spread, that has strong predictive power for many long/short anomalies.

Keywords: Value Spread, Profitability Spread, Investment Spread, Composite Characteristic Spread, Factor Returns

JEL Classification: G11, G12

Suggested Citation

Dai, Yiqing and Haque, Tariq H. and Zurbruegg, Ralf, Using Cashflow and Value Spreads to Forecast Long/Short Factor Returns (September 19, 2018). Available at SSRN: https://ssrn.com/abstract=3266175 or http://dx.doi.org/10.2139/ssrn.3266175

Yiqing Dai

University of Adelaide ( email )

Adelaide, Australian Capital Territory
Australia

Tariq H. Haque (Contact Author)

University of Adelaide ( email )

10 Pulteney St, Adelaide Busines School
Adelaide, South Australia 5005
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Ralf Zurbruegg

University of Adelaide ( email )

233 North Terrace
Department of Finance
Adelaide SA 5005
Australia
+61 8 8303 5535 (Phone)
+61 8 8303 4368 (Fax)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

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