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The Value Spread as a Predictor of Returns

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  • Naiping Lu
  • Lu Zhang

Abstract

Recent studies have used the value spread to predict aggregate stock returns to construct cash-flow betas that appear to explain the size and value anomalies. We show that two related variables, the book-to-market spread (the book-to-market of value stocks minus that of growth stocks) and the market-to-book spread (the market-to-book of growth stocks minus that of value stocks) predict returns in different directions and exhibit opposite cyclical variations. Most important, the value spread mixes information on the book-to-market and market-to-book spreads, and appears much less useful in predicting returns.

Suggested Citation

  • Naiping Lu & Lu Zhang, 2005. "The Value Spread as a Predictor of Returns," NBER Working Papers 11326, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:11326
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    Cited by:

    1. Ekaterini Panopoulou & Michail Koubouros, 2005. "Intertemporal Market Risks and the Cross-Section of Greek Average Returns," Economics Department Working Paper Series n1611205, Department of Economics, National University of Ireland - Maynooth.
    2. Jiang, Danling, 2006. "Investor Overreaction, Cross-Sectional Dispersion of Firm Valuations, and Expected Stock Returns," Working Paper Series 2006-8, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    3. 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.
    4. Adam Zaremba, 2017. "Combining Equity Country Selection Strategies," Contemporary Economics, University of Economics and Human Sciences in Warsaw., vol. 11(1), March.

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    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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