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The Value Spread

Author

Listed:
  • 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%) 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 the value spread (the difference between the book-to-market ratio of a typical value stock and a typical growth stock) is wide.

Suggested Citation

  • Randolph B. Cohen & Christopher Polk & Tuomo Vuolteenaho, 2001. "The Value Spread," NBER Working Papers 8242, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:8242
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    References listed on IDEAS

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    1. 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.
    2. 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.
    3. 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.
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    Cited by:

    1. Frederico Belo & Chen Xue & Lu Zhang, 2010. "Cross-sectional Tobin's Q," NBER Working Papers 16336, National Bureau of Economic Research, Inc.
    2. Li Jin & Stewart C. Myers, 2004. "R-Squared Around the World: New Theory and New Tests," NBER Working Papers 10453, National Bureau of Economic Research, Inc.
    3. Edward Bernard Bastiaan de Rivera y Rivera & Diógenes Manoel Leiva Martin & Emerson Fernandes Marçal & Leonardo Fernando Cruz Basso, 2012. "Present value model between prices and dividends with constant and time-varying expected returns: enterprise-level Brazilian stock market evidence from non-stationary panels," Brazilian Business Review, Fucape Business School, vol. 9(4), pages 51-86, October.
    4. John Y. Campbell & Tuomo Vuolteenaho, 2004. "Bad Beta, Good Beta," American Economic Review, American Economic Association, vol. 94(5), pages 1249-1275, December.
    5. Tano Santos & Pietro Veronesi, 2005. "Cash-Flow Risk, Discount Risk, and the Value Premium," NBER Working Papers 11816, National Bureau of Economic Research, Inc.
    6. John Y. Campbell & Jens Hilscher & Jan Szilagyi, 2008. "In Search of Distress Risk," Journal of Finance, American Finance Association, vol. 63(6), pages 2899-2939, December.
    7. John H. Cochrane, 2011. "Discount Rates," NBER Working Papers 16972, National Bureau of Economic Research, Inc.
    8. Randolph B. Cohen & Christopher Polk & Tuomo Vuolteenaho, 2009. "The Price Is (Almost) Right," Journal of Finance, American Finance Association, vol. 64(6), pages 2739-2782, December.
    9. Belén Nieto & Rosa Rodríguez & Rosa Rodríguez- Barrera, 2002. "The Consumption-Wealth And Book-To-Market Ratios In A Dynamic Asset Pricing Context," Working Papers. Serie EC 2002-24, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
    10. Jeeman Jung & Robert J. Shiller, 2002. "One Simple Test of Samuelson's Dictum for the Stock Market," Cowles Foundation Discussion Papers 1386, Cowles Foundation for Research in Economics, Yale University.
    11. Hjalmarsson, Erik, 2008. "The Stambaugh bias in panel predictive regressions," Finance Research Letters, Elsevier, vol. 5(1), pages 47-58, March.
    12. Ľuboš Pástor & Veronesi Pietro, 2003. "Stock Valuation and Learning about Profitability," Journal of Finance, American Finance Association, vol. 58(5), pages 1749-1789, October.
    13. Robert J. Shiller, 2003. "From Efficient Markets Theory to Behavioral Finance," Journal of Economic Perspectives, American Economic Association, vol. 17(1), pages 83-104, Winter.
    14. John H. Cochrane & Francis A. Longstaff & Pedro Santa-Clara, 2003. "Two Trees: Asset Price Dynamics Induced by Market Clearing," NBER Working Papers 10116, National Bureau of Economic Research, Inc.
    15. Belén Nieto & Rosa Rodríguez, 2006. "The Consumption/Wealth and Book/Market Ratios in a Dynamic Asset Pricing Contex," Spanish Economic Review, Springer;Spanish Economic Association, vol. 8(3), pages 199-226, September.
    16. Zoltan Matolcsy & Anne Wyatt, 2006. "Capitalized intangibles and financial analysts," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 46(3), pages 457-479, September.
    17. Tolga Cenesizoglu, 2010. "Size, Book-to-Market Ratio and Macroeconomic News," Cahiers de recherche 1033, CIRPEE.
    18. John H. Cochrane & Francis A. Longstaff & Pedro Santa-Clara, 2003. "Two Trees: Asset Price Dynamics Induced by Market Clearing," Levine's Bibliography 666156000000000355, UCLA Department of Economics.

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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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