On the Cross Section of Conditionally Expected Stock Returns

44 Pages Posted: 8 Mar 2004

See all articles by Hui Guo

Hui Guo

University of Cincinnati - Department of Finance - Real Estate

Robert Savickas

George Washington University - School of Business - Department of Finance

Date Written: October 28, 2005

Abstract

We test and find evidence against Sharpe (1964) and Lintner's (1965) CAPM using portfolios motivated by Campbell's (1993) ICAPM, which is our alternative hypothesis. That is, we sort stocks equally into ten portfolios according to out-of-sample forecasts formed using predictive variables advocated by recent authors. The average out-of-sample realized returns of these portfolios increase monotonically from the first decile(stocks with the lowest expected returns) to the tenth decile (stocks with the highest expected returns), and the difference between the tenth and first deciles is a statistically significant 4.8 percent per year. These results are shown to be distinct from the momentum anomaly documented by Jegadeesh and Titman (1993). As expected, these portfolio returns pose a challenge to CAPM; however, they are explained by a variant of Campbell's ICAPM, in which risk factors also include the variables used to form the expected returns, in addition to stock market returns.

Keywords: Stock Return Predictability, Cross Section of Stock Returns, Size Premium, Value Premium, and Momentum Profit

JEL Classification: G1

Suggested Citation

Guo, Hui and Savickas, Robert, On the Cross Section of Conditionally Expected Stock Returns (October 28, 2005). Available at SSRN: https://ssrn.com/abstract=515184 or http://dx.doi.org/10.2139/ssrn.515184

Hui Guo (Contact Author)

University of Cincinnati - Department of Finance - Real Estate ( email )

College of Business
418 Carl H. Lindner Hall
Cincinnati, OH 45221
United States
513.556.7077 (Phone)
513.556.0979 (Fax)

HOME PAGE: http://homepages.uc.edu/~guohu/

Robert Savickas

George Washington University - School of Business - Department of Finance ( email )

Funger Hall, Suite 501R
2201 G Street, N.W.
Washington, DC 20052
United States
202-994-8936 (Phone)
202-994-5014 (Fax)

HOME PAGE: http://savickas.net/

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