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The Value Spread

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Author Info
Randolph B. Cohen (Harvard Business School)
Christopher Polk (Kellogg School of Management, Northwestern University)
Tuomo Vuolteenaho (Department of Economics, Harvard University and the NBER)

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Abstract

We decompose the cross-sectional variance of firms' book-to-market ratios using both a long U.S. panel and a shorter international panel. In contrast to typical aggregate time-series results, transitory cross-sectional variation in expected 15-year stock returns causes only a relatively small fraction (20 to 25 percent) of the total cross-sectional variance. The remaining dispersion can be explained by expected 15-year profitability and persistence of valuation levels. Furthermore, this fraction appears stable across time and across types of stocks. We also show that the expected return on value-minus-growth strategies is atypically high at times when their spread in book-to-market ratios is wide. Copyright (c) 2003 by the American Finance Association.

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Publisher Info
Article provided by American Finance Association in its journal The Journal of Finance.

Volume (Year): 58 (2003)
Issue (Month): 2 (04)
Pages: 609-642
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Handle: RePEc:bla:jfinan:v:58:y:2003:i:2:p:609-642

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February. [Downloadable!] (restricted)
  2. Fama, Eugene F & French, Kenneth R, 1995. " Size and Book-to-Market Factors in Earnings and Returns," Journal of Finance, American Finance Association, vol. 50(1), pages 131-55, March. [Downloadable!] (restricted)
  3. Fama, Eugene F & French, Kenneth R, 1996. " Multifactor Explanations of Asset Pricing Anomalies," Journal of Finance, American Finance Association, vol. 51(1), pages 55-84, March. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Jeeman Jung & Robert J. Shiller, 2002. "One Simple Test of Samuelson's Dictum for the Stock Market," Cowles Foundation Discussion Papers 1386, Cowles Foundation, Yale University. [Downloadable!]
    Other versions:
  2. Lubos Pastor & Pietro Veronesi, 2002. "Stock Valuation and Learning about Profitability," NBER Working Papers 8991, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. Tano Santos & Pietro Veronesi, 2005. "Cash-Flow Risk, Discount Risk, and the Value Premium," NBER Working Papers 11816, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Campbell, John Y. & Hilscher, Jens & Szilagyi, Jan, 2005. "In search of distress risk," Discussion Paper Series 1: Economic Studies 2005,27, Deutsche Bundesbank, Research Centre. [Downloadable!]
    Other versions:
  5. Belén Nieto & Rosa Rodríguez & Rosa Rodríguez- Barrera, 2002. "The Consumption-Wealth And Book-To-Market Ratios In A Dynamic Asset Pricing Context," Working Papers. Serie EC 2002-24, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie). [Downloadable!]
  6. Erik Hjalmarsson, 2007. "The Stambaugh bias in panel predictive regressions," International Finance Discussion Papers 914, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  7. Robert J. Shiller, 2003. "From Efficient Markets Theory to Behavioral Finance," Journal of Economic Perspectives, American Economic Association, vol. 17(1), pages 83-104, Winter. [Downloadable!] (restricted)
    Other versions:
  8. John Y. Campbell & Tuomo Vuolteenaho, 2004. "Bad Beta, Good Beta," American Economic Review, American Economic Association, vol. 94(5), pages 1249-1275, December. [Downloadable!]
    Other versions:
  9. John H. Cochrane & Francis A. Longstaff & Pedro Santa-Clara, 2003. "Two Trees: Asset Price Dynamics Induced by Market Clearing," Levine's Bibliography 666156000000000355, UCLA Department of Economics. [Downloadable!]
    Other versions:
  10. 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. [Downloadable!]
  11. Belén Nieto & Rosa Rodríguez, 2006. "The Consumption/Wealth and Book/Market Ratios in a Dynamic Asset Pricing Contex," Spanish Economic Review, Springer, vol. 8(3), pages 199-226, September. [Downloadable!] (restricted)
  12. Bhagwan Chowdhry & Mark Garmaise, 2003. "Organization Capital and Intrafirm Communication," University of California at Los Angeles, Anderson Graduate School of Management 1108, Anderson Graduate School of Management, UCLA. [Downloadable!]
  13. Randolph B. Cohen & Christopher Polk & Tuomo Vuolteenaho, 2003. "The Price is (Almost) Right," NBER Working Papers 10131, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  14. Xavier Gabaix, 2008. "Variable Rare Disasters: An Exactly Solved Framework for Ten Puzzles in Macro-Finance," NBER Working Papers 13724, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  15. Vaihekoski, Mika, 2008. "History of finance research and education in Finland: the first thirty years," Research Discussion Papers 18/2008, Bank of Finland. [Downloadable!]
  16. Manuel Ammann & Michael Verhofen, 2006. "The Effect of Market Regimes on Style Allocation," Financial Markets and Portfolio Management, Springer, vol. 20(3), pages 309-337, September. [Downloadable!] (restricted)
  17. Li Jin & Stewart C. Myers, 2004. "R-Squared Around the World: New Theory and New Tests," NBER Working Papers 10453, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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