Commonality in the Determinants of Expected Stock Returns

Posted: 22 Aug 1998


Evidence is presented that the determinants of the cross-section of expected stock returns are stable in their identity and influence from period to period and from country to country. The determinants are related to risk, liquidity, price-level, growth potential, and stock price history. Out-of-sample predictions of expected return, using trailing moving average values for the payoffs to these firm characteristics, are strongly and consistently accurate. Moreover, the stocks with higher expected and realized return rates of return are generally and unambiguously of lower risk than stocks with lower returns. Given the nature of the tests, it is highly unlikely that these results may be attributed to bias or data snooping. Consequently, the results seem to reveal a major failure in the Efficient Markets Hypothesis.

JEL Classification: G19

Suggested Citation

Haugen, Robert A. and Baker, Nardin L., Commonality in the Determinants of Expected Stock Returns. Available at SSRN:

Robert A. Haugen (Contact Author)

Haugen Custom Financial Systems ( email )

128 W. 14th Street
Suite 201
Durango, CO 81301
United States
(970) 259-9512 (Phone)


Nardin L. Baker

SSIA ( email )

178 South Street
Needham, MA 02492
United States
617-840-8528 (Phone)

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