Stock Characteristics and Stock Returns: A Skeptic’s Look at the Cross-Section of Returns

25 Pages Posted: 20 Nov 2019 Last revised: 23 Dec 2019

See all articles by Bradford Cornell

Bradford Cornell

Anderson Graduate School of Management, UCLA

Date Written: November 9, 2019

Abstract

The correlation between stock characteristics and the cross-section of stock returns plays a central role in empirical implementations of modern asset pricing models and has important implications for investment management. This remains true whether the correlation is due to investor preferences regarding the characteristics directly or whether the characteristics are proxies for state variables the risk of which investors are attempting to hedge. This paper asks what do we know about the relation between these characteristics and the cross-section of returns? The skeptic’s answer is not much. A combination of lack of persistence in the characteristics along with problems caused by model uncertainty, data snooping, and nonstationarity means that our knowledge is sketchy at best. Investors should be forewarned when considering any strategies such as smart beta that are premised on the correlation between characteristics and the cross-section of returns.

Keywords: stock characteristics, stock returns, asset pricing

JEL Classification: G00, G10, G12

Suggested Citation

Cornell, Bradford, Stock Characteristics and Stock Returns: A Skeptic’s Look at the Cross-Section of Returns (November 9, 2019). Available at SSRN: https://ssrn.com/abstract=3484123 or http://dx.doi.org/10.2139/ssrn.3484123

Bradford Cornell (Contact Author)

Anderson Graduate School of Management, UCLA ( email )

Pasadena, CA 91125
United States
626 833-9978 (Phone)

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