Critical Finance Review > Vol 11 > Issue 2

Dissecting Market Expectations in the Cross-Section of Book-to-Market Ratios

Thiago de Oliveira Souza, University of Southern Denmark, Department of Business and Economics, Denmark, tsouza@sam.sdu.dk
 
Suggested Citation
Thiago de Oliveira Souza (2022), "Dissecting Market Expectations in the Cross-Section of Book-to-Market Ratios", Critical Finance Review: Vol. 11: No. 2, pp 361-373. http://dx.doi.org/10.1561/104.00000116

Publication Date: 03 May 2022
© 2022 Thiago de Oliveira Souza
 
Subjects
 
Keywords
G11G12G14
PredictabilityOut-of-sampleEquity premiumDisaggregated book-to-markets
 

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In this article:
1. PLS Estimation 
2. Data 
3. PLS and Some Empirical Choices in the Original Sample 
4. Extended Sample and Other Empirical Choices 
5. Summary 
References 

Abstract

This paper starts by successfully replicating all the main results in Kelly and Pruitt (2013) for the return on the market—and providing some evidence of market premium predictability—based on their original empirical choices in the 1930–2010 sample. However, the evidence of market premium predictability, in particular, essentially disappears by making any one of the following changes: (i) updating the sample to June 1926–December 2019; (ii) not taking logs of the book-to-markets used as regressors; (iii) not dividing book-to-markets by their time-series standard deviations; or (iv) not taking one extra book-to-market lag (for monthly forecasts). In summary, I find no evidence that the procedure generates a valid forecasting model of market premiums with persistently positive out-of-sample R2 in the full 1926–2019 sample, especially since the Oil Shock (or early 2000).

DOI:10.1561/104.00000116