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Expected returns, yield spreads, and asset pricing tests

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  • Murillo Campello
  • Long Chen
  • Lu Zhang

Abstract

We construct firm-specific measures of expected equity returns using corporate bond yields, and replace standard ex post average returns with our expected-return measures in asset pricing tests. We find that the market beta is significantly priced in the cross section of expected returns. The expected size and value premiums are positive and countercyclical, but there is no evidence of positive expected momentum profits. The Author 2008. Published by Oxford University Press on behalf of the Society for Financial Studies. All rights reserved. For permissions, please e-mail: journals.permissions@oxfordjournals.org., Oxford University Press.

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Bibliographic Info

Article provided by Society for Financial Studies in its journal The Review of Financial Studies.

Volume (Year): 21 (2008)
Issue (Month): 3 (May)
Pages: 1297-1338

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Handle: RePEc:oup:rfinst:v:21:y:2008:i:3:p:1297-1338

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Cited by:
  1. Gene Amromin & Steven A. Sharpe, 2009. "Expectations of risk and return among household investors: Are their Sharpe ratios countercyclical?," Proceedings, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco, issue Jan.
  2. Jens Hilscher & Mungo Wilson, 2011. "Credit ratings and credit risk," Working Papers, Brandeis University, Department of Economics and International Businesss School 31, Brandeis University, Department of Economics and International Businesss School.
  3. Anginer, Deniz & Yildizhan, Celim, 2009. "Is there a Distress Risk Anomaly? Pricing of Systematic Default Risk in the Cross Section of Equity Returns," MPRA Paper 53885, University Library of Munich, Germany, revised 23 Apr 2013.
  4. Hett, Florian & Schmidt, Alexander, 2013. "Bank rescues and bailout expectations: The erosion of market discipline during the financial crisis," SAFE Working Paper Series 36, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
  5. Jiang, Xiaoquan & Lee, Bong-Soo, 2014. "The intertemporal risk-return relation: A bivariate model approach," Journal of Financial Markets, Elsevier, Elsevier, vol. 18(C), pages 158-181.
  6. Chen, Long & Petkova, Ralitsa & Zhang, Lu, 2008. "The expected value premium," Journal of Financial Economics, Elsevier, Elsevier, vol. 87(2), pages 269-280, February.
  7. Jäckel, Christoph, 2013. "Model uncertainty and expected return proxies," MPRA Paper 51978, University Library of Munich, Germany.
  8. Long Chen & Hui Guo & Lu Zhang, 2006. "Equity market volatility and expected risk premium," Working Papers, Federal Reserve Bank of St. Louis 2006-007, Federal Reserve Bank of St. Louis.
  9. Florian Hett & Alexander Schmidt, 2013. "Bank Bailouts and Market Discipline: How Bailout Expectations Changed During the Financial Crisis," Working Papers 1305, Gutenberg School of Management and Economics, Johannes Gutenberg-Universität Mainz, revised 01 Aug 2013.
  10. Tobias Schlueter & Soenke Sievers, 2014. "Determinants of market beta: the impacts of firm-specific accounting figures and market conditions," Review of Quantitative Finance and Accounting, Springer, Springer, vol. 42(3), pages 535-570, April.
  11. Füss, Roland & Gehrig, Thomas & Rindler, Philipp B, 2011. "Scattered Trust - Did the 2007-08 financial crisis change risk perceptions?," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8714, C.E.P.R. Discussion Papers.
  12. Gene Amromin & Steven Sharpe, 2005. "From the horse’s mouth: gauging conditional expected stock returns from investor surveys," Proceedings, Board of Governors of the Federal Reserve System (U.S.).

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