The cross section of individual equity option returns abstract we examine a large set of potential determinants of expected option returns to identify the characteristics that can predict the expected returns of individual equity options. So intuitively, if you study the cross section of stock returns, you want to answer the question why stock a earns higherlower returns than stock b. We find that sellorder illiquidity is priced more strongly in the cross section of expected stock returns than is buyorder illiquidity. The crosssection of expected stock returns 429 also possible, however, that beme just captures the unraveling regression toward the mean of irrational market whims about the prospects of firms. Ball 1978 argues that ep is a catchall proxy for unnamed factors in expected returns. What determines the cross section of expected stock returns. The conditional capm and the cross section of expected returns 5 business cycle. Media coverage and the crosssection of stock returns 2025 and even firms public relation programs can affect firms cost of capital. The cross section of expected stock returns by jonathan lewellen. How average returns change across different stock or portfolios. This paper provides new evidence on the crosssectional properties of expected stock returns, focusing on two closely related questions that, to date, do not have clear answers in the literature. Crash sensitivity and the cross section of expected stock returns volume 53 issue 3 fousseni chabiyo, stefan ruenzi, florian weigert skip to main content accessibility help we use cookies to distinguish you from other users. Worldwide, stocks with strong crash sensitivity deliver average returns of more than.
Any rational asset pricing theory implies that expected stock returns admit a beta representation, where betas are computed with respect to a discount factor cochrane 2005. Our goal is to provide guidance as to the appropriate significance level using a multiple testing framework. Crash sensitivity and the crosssection of expected stock returns. Thus, they conclude that beta is neither a single relevant risk measure nor a subset of variables in a multivariate specification to explain crosssectional stock returns variations of. Thus, we look for evidence on the pricing of the buy and sellorder illiquidity measures in the crosssection of expected stock returns. Cross section of volatility and expected returns 261 of assets that may have different exposures to aggregate volatility and hence different average returns.
Crosssectional analysis is a type of analysis that an investor, analyst or portfolio manager may conduct on a company in relation to that companys industry or. Crash sensitivity and the cross section of expected stock returns abstract this paper examines whether investors receive compensation for holding crashsensitive stocks. When we estimate the spanning tests post and pre1990, we find that retained earningstomarket subsumes the. Regarding the scaling measure, we find that irrespective of the choice of a profit measure, the crosssectional predictive relation of firm profitability and stock returns is more pronounced when profits are scaled by enterprise value or market value of equity. It is this unknown risk factor that we have in mind when we classify. Thus, we look for evidence on the pricing of the buy and sellorder illiquidity measures in the cross section of expected stock returns. We examine crosssectional anomalies in stock returns using handcollected accounting data extending back to the start of the 20th century. Also, to the extent that the business cycle is induced. Crash sensitivity and the cross section of expected stock returns volume 53 issue 3 fousseni chabiyo, stefan ruenzi, florian weigert skip to main content accessibility help we use cookies to distinguish you from other users and to provide you with a better experience on our websites. However, the nature of the discount factor remains elusive despite several decades of active academic research. They can be regarded as different ways of extracting information from stock prices about the cross. Size and booktomarket factors in earnings and returns. April 2008 preliminary and incomplete abstract motivated by existing evidence of a preference among investors for assets with lotterylike payoffs and that.
The sample covers stockreturns data over the period 19912016 from four regions in the world. This paper presents a new pattern in the cross section of expected stock returns. My paper also relates to fama and french 1997, simin 2008, and levi and welch 2014, who show that the capm and famafrench 1993 threefactor model do not provide reliable estimates of. This study attempts to analyze and identify presence of herd behavior amongst investors, using daily returns of 387 stocks listed on pakistan stock. Expected stock returns idiosyncratic return volatility cross section 1. But a recent paper by ang, hodrick, xing, and zhang 2006, ahxz hereafter finds that, in the crosssection of. The conditional capm and the crosssection of expected returns 5 business cycle.
Alternative profitability measures and cross section of. This paper studies the crosssectional properties of return forecasts derived from famamacbeth. Stocks tend to have relatively high or low returns every year in the same calendar month. Machine learning and the crosssection of expected stock returns dissertation university of st. Pdf the crosssection of expected stock returns jean.
Calculating expected portfolio returns and portfolio variances. The cross section of expected stock returns tuck school of business. Whatever the underlying economic causes, our main result is straightfor ward. The cross section of stock returns is a comprehensive overview of the most important findings of empirical asset pricing research. January 15, 20 abstract aggregate stock market returns are naturally categorized as either small or large movements. There are several empirical contradictions of the sharpelintnerblack slb model. There is also evidence that investors have a preference for lotterylike assets, i. Retained earnings comprise the accumulated total earnings the firm generated over its history less accumulated dividend distributions. Fama and french 1992 find that two variables, market equity me and the ratio of book equity to market equity beme capture much of the cross section of average stock returns. Pdf the crosssection of expected stock returns semantic scholar. Media coverage and the cross section of stock returns lily fang and joel peress forthcoming in the journal of finance abstract by reaching a broad population of investors, mass media can alleviate informational frictions and. Gallen school of management, economics, law, social sciences and international a. While market participants and company executives recognize that information dissemination plays a crucial role in determining the cost of capital, traditionally.
Pdf the crosssection of expected stock returns semantic. The authors thank ariel zucker and daniel green for outstanding research assistance. The cross section of expected stock returns 429 also possible, however, that beme just captures the unraveling regression toward the mean of irrational market whims about the prospects of firms. What is cross section in cross section of stock return. Crash sensitivity and the cross section of expected stock. The crosssection of expected stock returns critical finance. If aggregate volatility is a risk factor that is orthogonal to existing risk factors, the sensitivity of stocks. Price, cultural dimensions, and the crosssection of expected. Underdiversified investors demand a return compensation for bearing idiosyncratic risk. Common risk factors in the returns on stocks and bonds. Among them are levy 1978, merton 1987, and malkiel and xu 2002. Roberts june 2017 draft abstract using data spanning the 20th century, we show that the majority of accountingbased return anomalies, including investment and pro tability, are most likely an artifact of data snooping.
These forecasts mimic how an investor could, in real time, combine many firm characteristics to obtain a composite estimate of a stockas expected return. Forecasts based on longer histories of fm slopes work best and, statistically, are quite strongly related to subsequent annual returns. These forecasts mimic how an investor could, in real time, combine many firm characteristics to get a composite estimate of a stocks expected return. First, when deflated by market values, earnings likely share common economic determinants with. Two easily measured variables, size me and booktomarket equity. Crash aversion and the cross section of expected stock returns worldwide abstract this paper examines whether investors receive compensation for holding stocks with a strong sensitivity to extreme market downturns in a sample covering forty countries. My results suggest that crosssectional regressions provide quite reliable estimates of expected returnsindeed, the estimates appear to be much more reliable than prior work has found for the implied cost of capital, though a direct. We use the adaptive least absolute shrinkage and selection operator lasso to select. Aggregate jump and volatility risk in the crosssection of.
Stocks as lotteries and the crosssection of expected returns turan g. To examine the impact of proximity of extreme stock returns to the end of daily the month and their subsequent reversal, we calculate dmax distance of max as the number of days between the day when the maximum daily return max is observed and. This paper studies the properties and predictive ability of return forecasts from famamacbeth crosssectional regressions. Idiosyncratic risk and the crosssection of expected stock returns. Earnings, retained earnings, and booktomarket in the cross. First, we cross sectionally estimate a price of risk for aggregate market volatility. P, leverage, and booktomarket equity in the cross section of average stock returns. Financial economists have long been engrossed with explaining the cross section of stock returns. Seasonality in the crosssection of stock returns steven l. The crosssection of individual equity option returns. While market participants and company executives recognize that information dissemination plays a crucial role in.
Price, cultural dimensions, and the cross section of expected stock returns ulrich j. Given that so many papers have attempted to explain the same crosssection of expected returns, statistical inference should not be based on a single test perspective. Crash sensitivity and the cross section of expected stock returns volume 53 issue 3 fousseni chabiyo, stefan ruenzi, florian weigert. During a recession, for example, financial leverage of firms in relatively poor shape may increase sharply relative to other firms, causing their stock betas to rise. The assetpricing literature finds significant crosssectional predictability in stock returns. We provide a systematic study of how stochastic volatility is priced in the cross section of expected stock returns. Earnings, retained earnings, and booktomarket in the cross section of expected returns abstract we delve into what causes the relation between booktomarket and the cross section of stock returns. Media coverage and the crosssection of stock returns. Timevarying market volatility induces changes in the investment opportunity set by changing the expectation of future market returns, or by changing the riskreturn tradeoff. Financial intermediaries and the crosssection of asset returns. Predicting stock returns using firm characteristics. The crosssection of volatility and expected returns. The cross section of cashflow volatility and expected.
Continuous beta, discontinuous beta, and the crosssection of expected stock returns sophia zhengzi liy job market paper this version. Many option studies have estimated a negative price of risk for market. The crosssection of expected stock returns econpapers. Crash aversion and the crosssection of expected stock. A new factor model consisting of the market factor, an investment factor, and a returnonequity factor is a good start to understanding the cross section of expected stock returns. Cross section of expected stock returns in ise levent akdeniz asl. This question has been central to modern financial economics since the path breaking work of sharpe, lintner and mossin. Abstract two easily measured variables, size and book. Media coverage and the crosssection of stock returns lily fang and joel peress forthcoming in the journal of finance abstract by reaching a broad population of investors, mass media can alleviate informational frictions and. The ones marked may be different from the article in the profile.
Book value of equity consists of two main components that we expect contain di er. First, we crosssectionally estimate a price of risk for aggregate market volatility. Seasonality in the crosssection of expected stock returns. Aggregation of information about the cross section of. Two easily measured variables, size and booktomarket equity, combine to capture the crosssectional variation in average stock returns associated with market b. Expected stock returns, predictability, outofsample. Crosssection of expected returns and extreme returns. Since all these variables are scaled versions of price, it is reasonable to expect that some of them are redundant for explaining average returns.
The book begins with thorough expositions of the most prevalent econometric techniques with indepth discussions of the implementation and interpretation of results illustrated through. The cross section of expected stock returns 5 the fm slopes. Funding liquidity and the cross section of stock returns adrian and etula, 2010 and intermediary leverage and the crosssection of expected returns muir, 2010. In addition, we investigate whether future jump and volatility risk. We find evidence of a significant negative premium for exposure to dispersion risk, where expected returns vary according to the stocks sensitivities to the aggregate dispersion factor. Pdf this paper explores the ability of the capital asset pricing model, as well as the firm specific factors, to explain the crosssectional. Machine learning and the crosssection of expected stock. Product market competition, gross profitability, and cross. Ep is likely to be higher prices are lower relative to earnings for stocks with higher risks and expected returns, whatever the unnamed sources of risk. In the continuoustime model setup, we can formally identify these. Hundreds of papers and hundreds of factors attempt to explain the crosssection of expected returns. Sellorder liquidity and the crosssection of expected. We find that sellorder illiquidity is priced more strongly in the crosssection of expected stock returns than is buyorder illiquidity.
The history of the cross section of stock returns juhani t. A professor in the department of finance at the college of business administration at the university of nebraskalincoln in lincoln ne 68588. We capture the crash sensitivity of stocks by their lower tail dependence ltd with the market based on copulas. Throughout the paper, our emphasis is on whether stocks expected returns are driven by their sensitivity to dispersion, after accounting for a large set of other systematic factors and stocks idiosyncratic characteristics. Empirically, the forecasts vary substantially across stocks and have strong predictive power for actual returns. Sellorder liquidity and the crosssection of expected stock. Regarding the scaling measure, we find that irrespective of the choice of a profit measure, the crosssectional predictive relation of firm profitability and stock returns is more pronounced when profits are scaled by. Singapore management university institutional knowledge at. Introduction there is a growing literature documenting a negative relationship between observed volatility and future stock returns. We want to determine if the volatility of the market is a priced risk factor and estimate the price of aggregate volatility risk. Stocks with relatively high low returns tend to have high low returns every year in the same calendar month. This sentiment is reflected in the paper at hand the crosssection of expected stock returns by jonathon lewellen. The efficiency of the market portfolio implies that a expected returns on securities are a positive linear function of their market. Does systemic risk in the financial sector predict future economic downturns.
The rational economic models in the mold of capm and apt have helped us understand the theoretical underpinnings of cross section of stock returns. Our focus is on uncovering contemporaneous effects because a contemporaneous relation between factor loadings and risk premiums is the foundation of a crosssectional risk return relation. This cited by count includes citations to the following articles in scholar. This paper provides an extensive international analysis of the cross sectional return predictive power of a variety of firmlevel profitability measures, calculated from different combinations of three important measures of earnings gross profit, operating income, and ebit and four scaling variables enterprise value, book value of assets, market value of equity, and book value of. We provide a systematic study of how stochastic volatility is priced in the crosssection of expected stock returns. October 2006 abstract this paper presents a new pattern in the crosssection of expected stock returns. May 12, 2019 abstract we document a nominal stock price effect that is like momentum associated with national. Crash sensitivity and the cross section of expected stock returns. Given this extensive data mining, it does not make any economic or statistical sense to use the usual significance criteria for a newly discovered factor, e.
Crosssection of volatility and expected returns 261 of assets that may have different exposures to aggregate volatility and hence different average returns. Stocks with higher sensitivities to dispersion are found to offer lower returns. Much of the predicted variation in expected returns is common to all three models, with pairwise correlations in their forecasts of 0. This paper studies the crosssectional properties of return forecasts derived from famamacbeth regressions.
Graduate school of business, university of chicago, 1101 east 58th street, chicago, il 60637. The crosssection of expected stock returns eugene f. The capital asset pricing model developed by sharpe 1964, lintner 1964 and black 1972 stipulate that the expected return on a stock is determined by the risk free interest rate and a risk premium. The conditional capm and the crosssection of expected. Earnings, retained earnings, and booktomarket in the. Continuous beta, discontinuous beta, and the crosssection of.
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