Is the Value Spread a Useful Predictor of Returns?

29 Pages Posted: 9 Apr 2007

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)

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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 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

Liu, Naiping and Zhang, Lu, Is the Value Spread a Useful Predictor of Returns?. Forthcoming, Journal of Financial Markets. Available at SSRN: https://ssrn.com/abstract=978748

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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