Working Paper: NBER ID: w25579
Authors: Matti Keloharju; Juhani T. Linnainmaa; Peter Nyberg
Abstract: Long-term expected returns appear to vary little, if at all, in the cross section of stocks. We devise a bootstrapping procedure that injects small amounts of variation into expected returns and show that even negligible differences in expected returns, if they existed, would be easy to detect. Markers of such differences, however, are absent from actual stock returns. Our estimates are consistent with production-based asset pricing models such as Berk, Green, and Naik (1999) and Gomes, Kogan, and Zhang (2003) in which firms' risks change over time. We show that long-term reversals in stock returns are the consequence of the rapid convergence in expected returns. Our results imply stock market anomalies have only a limited effect on firm valuations.
Keywords: long-term discount rates; expected returns; firm valuations; production-based asset pricing models
JEL Codes: G12; G31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| expected returns (G17) | firm risk profiles (G32) |
| firm characteristics (L20) | expected returns (G17) |
| past returns (G17) | future returns (G17) |
| expected returns converge (G17) | changes in risks (D81) |
| long-term expected returns (G12) | cross-sectional differences in expected returns (G40) |
| long-term reversals in stock returns (G17) | rapid convergence in expected returns (G17) |
| high-risk firms (G32) | less risky (D81) |
| short-term anomalies in stock returns (G14) | firm valuations (G32) |