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Is the value spread a useful predictor of returns?

  • Liu, Naiping
  • Zhang, Lu
Registered author(s):

No. Two related variables, the book-to-market spread (the book-to-market of value stocks minus the book-to-market of growth stocks), and the market-to-book spread (the market-to-book of growth stocks minus the market-to-book of value stocks) predict returns but with opposite signs. The value spread mixes the cyclical variations of the book-to-market and market-to-book spreads, and appears much less useful in predicting returns. Our evidence casts doubt on Campbell and Vuolteenaho [2004. Bad beta, good beta. American Economic Review 94(5), 1249-1275] because their conclusion relies critically on using the value spread as a predictor of aggregate stock returns.

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Article provided by Elsevier in its journal Journal of Financial Markets.

Volume (Year): 11 (2008)
Issue (Month): 3 (August)
Pages: 199-227

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Handle: RePEc:eee:finmar:v:11:y:2008:i:3:p:199-227
Contact details of provider: Web page: http://www.elsevier.com/locate/finmar

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