Firm Characteristics, Industry, Horizon and Time Effects, in the Cross-Section of Expected Stock Returns

University of Maastricht, Limburg Institute of Financial Economics Working Paper No. 03-008

33 Pages Posted: 6 Mar 2005 Last revised: 4 Aug 2009

See all articles by Rob Bauer

Rob Bauer

Maastricht University

Bart F. Diris

Erasmus University Rotterdam (EUR) - Department of Econometrics; Netspar

Borislav Pavlov

University of Maastricht, Limburg Institute of Financial Economics (LIFE)

Peter C. Schotman

Maastricht University - Department of Finance

Date Written: April 15, 2009

Abstract

We construct a panel data model to explain the cross-section of individual stock returns, using monthly data for 1,880 large US firms for 1985-2005. Model specification is geared towards multiple explanatory variables, poolability across industries, alternative forecast horizons, and the effects of unobserved heterogeneity among firms. We find that combining multiple firm characteristics increases the predictive power. High expected returns are mostly related to size, cashflow-to-price and turnover, and somewhat to earnings revisions and momentum. Diversified portfolios sorted on expected returns have moderate risk exposures and generate significant risk-adjusted returns over all horizons. Longer forecasting horizons drastically reduce portfolio turnover and hence lower costs.

Keywords: Stock returns, Forecasting, Panel data, Industry effects, Individual effects, Time effects

JEL Classification: C23, G11

Suggested Citation

Bauer, Rob and Diris, Bart Franciscus and Pavlov, Borislav and Schotman, Peter C., Firm Characteristics, Industry, Horizon and Time Effects, in the Cross-Section of Expected Stock Returns (April 15, 2009). University of Maastricht, Limburg Institute of Financial Economics Working Paper No. 03-008. Available at SSRN: https://ssrn.com/abstract=676686 or http://dx.doi.org/10.2139/ssrn.676686

Rob Bauer

Maastricht University ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands
+31 43 3883871 (Phone)

Bart Franciscus Diris

Erasmus University Rotterdam (EUR) - Department of Econometrics ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Netspar ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Borislav Pavlov (Contact Author)

University of Maastricht, Limburg Institute of Financial Economics (LIFE) ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands
+31(43)3884844 (Phone)
+31(43)3884875 (Fax)

Peter C. Schotman

Maastricht University - Department of Finance ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands
+31 43 388 3862 (Phone)
+31 43 388 4875 (Fax)

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