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Is the value spread a useful predictor of returns?

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  • Liu, Naiping
  • Zhang, Lu

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. Bad beta, good beta. American Economic Review 94(5), 1249-1275] because their conclusion relies critically on using the value spread as a predictor of aggregate stock returns.

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  • Liu, Naiping & Zhang, Lu, 2008. "Is the value spread a useful predictor of returns?," Journal of Financial Markets, Elsevier, vol. 11(3), pages 199-227, August.
    • Handle: RePEc:eee:finmar:v:11:y:2008:i:3:p:199-227
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    2. Maio, Paulo, 2013. "Return decomposition and the Intertemporal CAPM," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 4958-4972.
    3. Maria Mansanet-Bataller & Julien Chevallier & Morgan Hervé-Mignucci & Emilie Alberola, 2010. "The EUA-sCER Spread: Compliance Strategies and Arbitrage in the European Carbon Market," Post-Print halshs-00458991, HAL.
    4. Pedersen, Lasse Heje & Asness, Clifford S. & Liew, John M. & Thapar, Ashwin K, 2018. "Deep Value," CEPR Discussion Papers 12685, C.E.P.R. Discussion Papers.
    5. Adam Zaremba & Jacob Koby Shemer, 2018. "Price-Based Investment Strategies," Springer Books, Springer, number 978-3-319-91530-2, July.
    6. Nitschka, Thomas, 2010. "Cashflow news, the value premium and an asset pricing view on European stock market integration," Journal of International Money and Finance, Elsevier, vol. 29(7), pages 1406-1423, November.
    7. Nitschka, Thomas, 2006. "Does sensitivity to cashflow news explain the value premium on European stock markets?," Technical Reports 2006,12, Technische Universität Dortmund, Sonderforschungsbereich 475: Komplexitätsreduktion in multivariaten Datenstrukturen.
    8. Rytchkov, Oleg, 2010. "Expected returns on value, growth, and HML," Journal of Empirical Finance, Elsevier, vol. 17(4), pages 552-565, September.
    9. John M. Geppert & Stoyu I. Ivanov & Gordon V. Karels, 2011. "An examination of the information content of S&P 500 index changes," Review of Accounting and Finance, Emerald Group Publishing Limited, vol. 10(4), pages 411-426, November.
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