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Expected Returns, Yield Spreads, and Asset Pricing Tests

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  • Murillo Campello
  • Long Chen
  • Lu Zhang

Abstract

We use yield spreads to construct ex-ante returns on corporate securities, and then use the ex-ante returns in asset pricing assets. Differently from the standard approach, our tests do not use ex-post average returns as a proxy for expected returns. We find that the market beta plays a much more important role in the cross-section of expected returns than previously reported. The expected value premium is significantly positive and countercyclical. We find no evidence of ex-ante positive momentum profits.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11323.

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Date of creation: May 2005
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Publication status: published as Murillo Campello & Long Chen & Lu Zhang, 2008. "Expected returns, yield spreads, and asset pricing tests," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 21(3), pages 1297-1338, May.
Handle: RePEc:nbr:nberwo:11323

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Citations

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Cited by:
  1. Long Chen & Hui Guo & Lu Zhang, 2006. "Equity market volatility and expected risk premium," Working Papers 2006-007, Federal Reserve Bank of St. Louis.
  2. Jens Hilscher & Mungo Wilson, 2011. "Credit ratings and credit risk," Working Papers 31, Brandeis University, Department of Economics and International Businesss School.
  3. 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, vol. 42(3), pages 535-570, April.
  4. Gene Amromin & Steven A. Sharpe, 2008. "Expectations of risk and return among household investors: Are their Sharpe ratios countercyclical?," Finance and Economics Discussion Series 2008-17, Board of Governors of the Federal Reserve System (U.S.).
  5. Jiang, Xiaoquan & Lee, Bong-Soo, 2014. "The intertemporal risk-return relation: A bivariate model approach," Journal of Financial Markets, Elsevier, vol. 18(C), pages 158-181.
  6. Anginer, Deniz & Yildizhan, Celim, 2010. "Is there a distress risk anomaly ? pricing of systematic default risk in the cross section of equity returns," Policy Research Working Paper Series 5319, The World Bank.
  7. 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.
  8. 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.).
  9. Long Chen & Ralitsa Petkova & Lu Zhang, 2006. "The Expected Value Premium," NBER Working Papers 12183, National Bureau of Economic Research, Inc.
  10. Füss, Roland & Gehrig, Thomas & Rindler, Philipp B, 2011. "Scattered Trust - Did the 2007-08 financial crisis change risk perceptions?," CEPR Discussion Papers 8714, C.E.P.R. Discussion Papers.
  11. Jäckel, Christoph, 2013. "Model uncertainty and expected return proxies," MPRA Paper 51978, University Library of Munich, Germany.
  12. 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.

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