Article | Journal of Financial Economics

The Cross Section of Expected Holding Returns and Their Dynamics: A Present Value Approach

by Matthew R. Lyle and Charles C.Y. Wang


We provide a tractable model of firm-level expected holding period returns using two firm fundamentals—book-to-market ratio and ROE—and study the cross-sectional properties of the model-implied expected returns. We find that 1) firm-level expected returns and expected profitability are time-varying but highly persistent; 2) forecasts of holding period returns strongly predict the cross section of future returns up to three years ahead. We document a highly significant predictive pooled regression slope for future quarterly returns of 0.86, whereas the popular factor-based expected return models have either an insignificant or a significantly negative association with future returns. In supplemental analyses, we show that these forecasts are also informative of the time-series variation in aggregate conditions: 1) for a representative firm, the slope of the conditional expected return curve is more positive in good times, when expected short-run returns are relatively low; 2) the model-implied forecaster of aggregate returns exhibits modest predictive ability. Collectively, we provide a simple, theoretically motivated, and practically useful approach to estimating multi-period ahead-expected returns.

Keywords: Expected Returns; discount rates; holding period returns; fundamental valuation; Present value; Valuation; Investment Return;


Lyle, Matthew R., and Charles C.Y. Wang. "The Cross Section of Expected Holding Returns and Their Dynamics: A Present Value Approach." Journal of Financial Economics 116, no. 3 (June 2015): 505–525.