Forecasting Cross-Section Stock Returns using Theoretical Prices Estimated from an Econometric Model
AbstractWe contribute to the debate over whether forecastable stock returns reflect an unexploited profit opportunity or rationally reflect risk differentials. We test whether agents could earn excess returns by selecting stocks which have a low market price compared to an estimate of the fundamental value obtained from an econometric model. The criterion for stock picking is one which could actually have been implemented by agents operating in real time. We show that statistically significant, and quantitatively substantial excess returns are delivered by portfolios of stocks which are cheap relative to our estimate of fundamental value. There is no evidence that the underpriced stocks are relatively risky and hence the excess returns cannot easily be interpreted as an equilibrium compensation for risk.
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Bibliographic InfoPaper provided by Edinburgh School of Economics, University of Edinburgh in its series ESE Discussion Papers with number 47.
Date of creation: Apr 2004
Date of revision:
Excess returns; Trading rule; Efficient markets; present value model; stock prices;
Find related papers by JEL classification:
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-04-25 (All new papers)
- NEP-CFN-2004-04-25 (Corporate Finance)
- NEP-FIN-2004-04-25 (Finance)
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.:
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