Persistent Expected Returns and the Cross-Section of Stock Returns

65 Pages Posted: 5 Sep 2019 Last revised: 8 Apr 2022

See all articles by Devraj Basu

Devraj Basu

SKEMA Business School - Lille Campus

Marta Szymanowska

Erasmus University Rotterdam (EUR) - Department of Finance; Erasmus Research Institute of Management (ERIM)

Date Written: April 7, 2022

Abstract

Even though stock returns are not highly autocorrelated, their persistent expected returns, even if they are small, impact the cross-sectional estimations of asset pricing models and tests. We find that estimations that do not utilize conditioning information about the nature of persistent expected returns efficiently are biased. The bias is more severe for assets with larger and more persistent expected returns, for larger cross-section of assets and in shorter time-series. Our results, further, show that the estimation of the asset pricing models and tests that uses conditional information efficiently provides more accurate results in the presence of persistent expected returns.

Keywords: persistent expected returns, stochastic discount factor bounds, asset pricing tests, conditioning information

JEL Classification: G11, G12

Suggested Citation

Basu, Devraj and Szymanowska, Marta, Persistent Expected Returns and the Cross-Section of Stock Returns (April 7, 2022). Available at SSRN: https://ssrn.com/abstract=3444841 or http://dx.doi.org/10.2139/ssrn.3444841

Devraj Basu

SKEMA Business School - Lille Campus ( email )

Avenue Willy Brandt, Euralille
Lille, 59777
France

Marta Szymanowska (Contact Author)

Erasmus University Rotterdam (EUR) - Department of Finance ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands
+31104089607 (Phone)

HOME PAGE: http://www.rsm.nl/mszymanowska

Erasmus Research Institute of Management (ERIM) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
74
Abstract Views
787
rank
434,062
PlumX Metrics