Is the Value Spread a Useful Predictor of Returns?

Abstract

No. Two related variables, the book-to-market spread (the book-to-market of value stocks minus the book-to-market of growth stocks) and the market-to-book spread (the market-to-book of growth stocks minus the market-to-book of value stocks) predict returns but with opposite signs. The value spread mixes the cyclical variations of the book-to-market and market-to-book spreads, and appear much less useful in predicting returns. Our evidence casts doubt on recent studies that rely critically on using the value spread to predict aggregate stock returns.

Keywords: The Value Spread, Predictability, Business Cycles

JEL Classification: G12, E44, M41