Critical Finance Review > Vol 4 > Issue 1

The Cross-section of Expected Stock Returns

Jonathan Lewellen, Dartmouth College and The National Bureau of Economic Research, USA
 
Suggested Citation
Jonathan Lewellen (2015), "The Cross-section of Expected Stock Returns", Critical Finance Review: Vol. 4: No. 1, pp 1-44. http://dx.doi.org/10.1561/104.00000024

Publication Date: 29 Jun 2015
© 2015 J. Lewellen
 
Subjects
Asset pricing
 
Keywords
G11G12
Cross-sectional Asset PricingCAPMReturn Forecasting
 

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In this article:
1. Data 
2. Expected Stock Returns 
3. Longer-horizon Expected Returns 
4. Conclusions 
Appendix 
References 

Abstract

This paper studies the cross-sectional properties of return forecasts derived from Fama-MacBeth regressions. These forecasts mimic how an investor could, in real time, combine many firm characteristics to obtain a composite estimate of a stock’s expected return. Empirically, the forecasts vary substantially across stocks and have strong predictive power for actual returns. For example, using ten-year rolling estimates of Fama- MacBeth slopes and a cross-sectional model with 15 firm characteristics (all based on low-frequency data), the expected-return estimates have a cross-sectional standard deviation of 0.87% monthly and a predictive slope for future monthly returns of 0.74, with a standard error of 0.07.

DOI:10.1561/104.00000024