Dissecting Market Expectations in the Cross-Section of Book-to-Market Ratios

28 Pages Posted: 16 Sep 2019 Last revised: 15 Nov 2019

See all articles by Thiago de Oliveira Souza

Thiago de Oliveira Souza

University of Southern Denmark; Danish Finance Institute

Date Written: November 14, 2019


I find no evidence that partial least squares based on disaggregated book-to-market ratios produces a model of market premiums with persistently positive out-of-sample R2, as originally documented for market returns. This is consistent with time variation in predictability, for example, and does not necessarily invalidate the method. The two main drivers of the original performance are: (i) The sample period and (ii) the use of market returns as forecasting targets. Two other drivers are using, as regressors, (iii) the book-to-market ratios of the specific portfolios double-sorted by size and book-to-market (iv) divided by their standard deviations.

Keywords: predictability, out-of-sample, equity premium, disaggregated

JEL Classification: G11, G12, G14

Suggested Citation

de Oliveira Souza, Thiago, Dissecting Market Expectations in the Cross-Section of Book-to-Market Ratios (November 14, 2019). Available at SSRN: https://ssrn.com/abstract=3449526 or http://dx.doi.org/10.2139/ssrn.3449526

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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