The X-value factor and the solution of the value premium puzzle

43 Pages Posted: 8 Apr 2019 Last revised: 4 May 2020

See all articles by Thiago de Oliveira Souza

Thiago de Oliveira Souza

University of Southern Denmark; Danish Finance Institute

Multiple version iconThere are 2 versions of this paper

Date Written: May 3, 2020


X-value normalizes stock prices by the recursive out-of-sample expectation of each firm's net income, estimated by industry from its financials, while ignoring book equity. The resulting X-value factor is unspanned by the five Fama/French factors individually or in different combinations (each factor and the market; all factors together; all except value). X-value spans the value and investment premiums with a Sharpe ratio of 0.57 (compared to 0.39 for value). This evidence supports the value premium theory in which book equity is exclusively a proxy for expected cash flows - unrelated to risk - and contradicts almost every other theory.

Keywords: Risk premiums, stock returns, Fama and French, cash flow forecasting, out of sample

JEL Classification: G11, G12, G14

Suggested Citation

de Oliveira Souza, Thiago, The X-value factor and the solution of the value premium puzzle (May 3, 2020). Available at SSRN: or

Thiago De Oliveira Souza (Contact Author)

University of Southern Denmark ( email )

Campusvej 55
DK-5230 Odense, 5000

Danish Finance Institute ( email )

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