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  • Journal of Financial Economics

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

By: Matthew R. Lyle and Charles C.Y. Wang
  • Format:Print
  • | Pages:57
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Abstract

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

Citation

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

Charles C.Y. Wang

Accounting and Management
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Related Work

    • Journal of Financial Economics

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

    By: Matthew R. Lyle and Charles C.Y. Wang
Related Work
  • The Cross Section of Expected Holding Period Returns and Their Dynamics: A Present Value Approach By: Matthew R. Lyle and Charles C.Y. Wang
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