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Conditioning Variables and the Cross-Section of Stock Returns

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  • Wayne E. Ferson
  • Campbell R. Harvey

Abstract

Previous studies have identified predetermined variables that have some power to explain the time series of stock and bond returns. This paper shows that loadings on the same variables also provide significant cross-sectional explanatory power for stock portfolio returns. These loadings are important, over and the above the variables advocated by Fama and French (1993) in their three factor model,' and also the four factors of Elton, Gruber and Blake (1995). The explanatory power of the loadings on lagged variables is robust to various portfolio grouping procedures and other considerations. The lagged variables reveal information about the cross-section of expected returns that is not captured by popular asset pricing factors. These results carry implications for risk analysis, performance measurement, cost-of-capital calculations and other applications.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7009.

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Date of creation: Mar 1999
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Publication status: published as Journal of Finance, Vol. 54 (1999): 1325-1360.
Handle: RePEc:nbr:nberwo:7009

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