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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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Handle: RePEc:nbr:nberwo:11323

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Cited by:
  1. Jens Hilscher & Mungo Wilson, 2011. "Credit ratings and credit risk," Working Papers 31, Brandeis University, Department of Economics and International Businesss School.
  2. Jäckel, Christoph, 2013. "Model uncertainty and expected return proxies," MPRA Paper 51978, University Library of Munich, Germany.
  3. 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, issue Jan.
  4. 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.
  5. 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.).
  6. Long Chen & Hui Guo & Lu Zhang, 2006. "Equity market volatility and expected risk premium," Working Papers 2006-007, Federal Reserve Bank of St. Louis.
  7. Chen, Long & Petkova, Ralitsa & Zhang, Lu, 2008. "The expected value premium," Journal of Financial Economics, Elsevier, vol. 87(2), pages 269-280, February.
  8. 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.
  9. 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.
  10. Hett, Florian & Schmidt, Alexander, 2013. "Bank rescues and bailout expectations: The erosion of market discipline during the financial crisis," SAFE Working Paper Series 36, Center of Excellence SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.

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