Persistent Expected Returns and the Cross-Section of Stock Returns
65 Pages Posted: 5 Sep 2019 Last revised: 7 Dec 2022
Date Written: December 6, 2022
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: Suggested Citation