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The Cross-section of Expected Stock Returns

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  • Lewellen, Jonathan

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.

Suggested Citation

  • Lewellen, Jonathan, 2015. "The Cross-section of Expected Stock Returns," Critical Finance Review, now publishers, vol. 4(1), pages 1-44, June.
    • Handle: RePEc:now:jnlcfr:104.00000024
    DOI: 10.1561/104.00000024
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    More about this item

    Keywords

    Cross-sectional Asset Pricing; CAPM; Return Forecasting;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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