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The Value Spread as a Predictor of Returns

  • Naiping Lu
  • Lu Zhang
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Recent studies have used the value spread to predict aggregate stock returns to construct cash-flow betas that appear to explain the size and value anomalies. We show that two related variables, the book-to-market spread (the book-to-market of value stocks minus that of growth stocks) and the market-to-book spread (the market-to-book of growth stocks minus that of value stocks) predict returns in different directions and exhibit opposite cyclical variations. Most important, the value spread mixes information on the book-to-market and market-to-book spreads, and appears much less useful in predicting returns.

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File URL: http://www.nber.org/papers/w11326.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11326.

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Date of creation: May 2005
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Publication status: published as Liu, Naiping & Zhang, Lu, 2008. "Is the value spread a useful predictor of returns?," Journal of Financial Markets, Elsevier, vol. 11(3), pages 199-227, August.
Handle: RePEc:nbr:nberwo:11326
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