Working Paper: NBER ID: w11326
Authors: Naiping Liu; Lu Zhang
Abstract: 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.
Keywords: No keywords provided
JEL Codes: G12; E44; M41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| book-to-market spread (G19) | future market excess returns (G17) |
| book-to-market spread (G19) | small firm excess returns (L25) |
| market-to-book spread (G19) | future returns (G17) |
| value spread (D46) | returns (Y60) |