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Regularities

Author

Listed:
  • Laura X. L. Liu
  • Toni Whited
  • Lu Zhang

Abstract

The neoclassical q-theory is a good start to understand the cross section of returns. Under constant return to scale, stock returns equal levered investment returns that are tied directly with characteristics. This equation generates the relations of average returns with book-to-market, investment, and earnings surprises. We estimate the model by minimizing the differences between average stock returns and average levered investment returns via GMM. Our model captures well the average returns of portfolios sorted on capital investment and on size and book-to-market, including the small-stock value premium. Our model is also partially successful in capturing the post-earnings-announcement drift and its higher magnitude in small firms.

Suggested Citation

  • Laura X. L. Liu & Toni Whited & Lu Zhang, 2007. "Regularities," NBER Working Papers 13024, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:13024
    Note: AP CF EFG
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    File URL: http://www.nber.org/papers/w13024.pdf
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    Cited by:

    1. Lin, Xiaoji, 2012. "Endogenous technological progress and the cross-section of stock returns," Journal of Financial Economics, Elsevier, vol. 103(2), pages 411-427.
    2. Long Chen & Lu Zhang, 2007. "Neoclassical Factors," NBER Working Papers 13282, National Bureau of Economic Research, Inc.
    3. Lars-Alexander Kuehn, 2007. "Time-to-Build and Asset Prices," 2007 Meeting Papers 1015, Society for Economic Dynamics.

    More about this item

    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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