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Expected returns and business conditions: a commentary on Fama and French

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  • Angela Black

Abstract

Fama and French (1989) identify two useful variables for forecasting expected asset returns: the default and term spread. Jensen et al. (1996) show that the ability of default and term spreads to forecast expected returns is dependent upon the monetary environment. Motivated by the theoretical underpinnings of portfolio choice theory this paper uses a different measure of default and term premia. Using quarterly and monthly expected return data on four stock and one bond portfolio the results indicate that default and term premia constructed as the relative difference in returns possess a forecasting ability that is not dependent on the monetary environment. In addition, this alternative measure appears to be superior at forecasting expected returns than the more traditional default and term spread.

Suggested Citation

  • Angela Black, 2000. "Expected returns and business conditions: a commentary on Fama and French," Applied Financial Economics, Taylor & Francis Journals, vol. 10(4), pages 389-400.
    • Handle: RePEc:taf:apfiec:v:10:y:2000:i:4:p:389-400
    DOI: 10.1080/09603100050031516
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    Cited by:

    1. Francisco Jareno, 2008. "Spanish stock market sensitivity to real interest and inflation rates: an extension of the Stone two-factor model with factors of the Fama and French three-factor model," Applied Economics, Taylor & Francis Journals, vol. 40(24), pages 3159-3171.
    2. B. Jirasakuldech & Riza Emekter & Unro Lee, 2008. "Business conditions and nonrandom walk behaviour of US stocks and bonds returns," Applied Financial Economics, Taylor & Francis Journals, vol. 18(8), pages 659-672.

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