Market expectations in the cross-section of present values

Bryan Kelly, Seth Pruitt

Research output: Contribution to journalArticlepeer-review

199 Scopus citations


Returns and cash flow growth for the aggregate U.S. stock market are highly and robustly predictable. Using a single factor extracted from the cross-section of book-to-market ratios, we find an out-of-sample return forecasting R2 of 13% at the annual frequency (0.9% monthly). We document similar out-of-sample predictability for returns on value, size, momentum, and industry portfolios. We present a model linking aggregate market expectations to disaggregated valuation ratios in a latent factor system. Spreads in value portfolios' exposures to economic shocks are key to identifying predictability and are consistent with duration-based theories of the value premium.

Original languageEnglish (US)
Pages (from-to)1721-1756
Number of pages36
JournalJournal of Finance
Issue number5
StatePublished - Oct 2013
Externally publishedYes

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics


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