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The Value Spread

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  • Randolph B. Cohen
  • Christopher Polk
  • Tuomo Vuolteenaho

Abstract

We decompose the cross‐sectional variance of firms' book‐to‐market ratios using both a long U.S. panel and a shorter international panel. In contrast to typical aggregate time‐series results, transitory cross‐sectional variation in expected 15‐year stock returns causes only a relatively small fraction (20 to 25 percent) of the total cross‐sectional variance. The remaining dispersion can be explained by expected 15‐year profitability and persistence of valuation levels. Furthermore, this fraction appears stable across time and across types of stocks. We also show that the expected return on value‐minus‐growth strategies is atypically high at times when their spread in book‐to‐market ratios is wide.

Suggested Citation

  • Randolph B. Cohen & Christopher Polk & Tuomo Vuolteenaho, 2003. "The Value Spread," Journal of Finance, American Finance Association, vol. 58(2), pages 609-641, April.
    • Handle: RePEc:bla:jfinan:v:58:y:2003:i:2:p:609-641
    DOI: 10.1111/1540-6261.00539
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    References listed on IDEAS

    as
    1. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    2. Fama, Eugene F & French, Kenneth R, 1996. "Multifactor Explanations of Asset Pricing Anomalies," Journal of Finance, American Finance Association, vol. 51(1), pages 55-84, March.
    3. Fama, Eugene F & French, Kenneth R, 1995. "Size and Book-to-Market Factors in Earnings and Returns," Journal of Finance, American Finance Association, vol. 50(1), pages 131-155, March.
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    More about this item

    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

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