Is the Value Spread a Useful Predictor of Returns?

30 Pages Posted: 19 Apr 2004

See all articles by Naiping Liu

Naiping Liu

University of Pennsylvania - Statistics Department

Lu Zhang, 张橹

Ohio State University - Fisher College of Business; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: September 2006

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

Suggested Citation

Liu, Naiping and Zhang, Lu, Is the Value Spread a Useful Predictor of Returns? (September 2006). Simon Business School Working Paper No. FR 04-11; Ross School of Business Paper No. 1051. Available at SSRN: https://ssrn.com/abstract=532703 or http://dx.doi.org/10.2139/ssrn.532703

Naiping Liu

University of Pennsylvania - Statistics Department ( email )

Wharton School
Philadelphia, PA 19104
United States

Lu Zhang (Contact Author)

Ohio State University - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
585-267-6250 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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