Is the Value Spread a Useful Predictor of Returns?
29 Pages Posted: 9 Apr 2007
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 appears much less useful in predicting returns. Our evidence casts doubt on Campbell and Vuolteenaho (2004) because their conclusion relies critically on using the value spread as a predictor of aggregate stock returns.
Keywords: The Value Spread, Time Series Predictability, Business Cycles
JEL Classification: G12, E44, M41
Suggested Citation: Suggested Citation