Book-to-Market as a Predictor of Market Returns
Posted: 25 Aug 1998
The book-to-market ratio of the Dow Jones Index predicts market returns and small firm excess returns over the period of 1926 to 1992. Book-to-market contains information about future returns that is not captured by other variables that forecast returns such as interest yield spreads and dividend yields. Book-to-market's predictive ability is driven by the pre-1960 subsample. We also document that book-to-market and dividend yield forecast the excess returns of a high book-to-market portfolio minus the returns of a low book-to-market portfolio. The predictive ability of book-to-market appears related to the ability of book value to forecast future earnings.
JEL Classification: G19
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