The Cross Section of Expected Returns Around the World

• In Event: Valuation, cost of equity, and expected returns
  In Paper Session: EValuation, Cost of Equity, and expected Returns

Abstract

We show that a tractable model of firm-level expected returns derived from only two firm fundamentals — book-to-market ratio and ROE — performs well across 18 international equity markets. In regression-based tests and portfolio sorts, the model-implied proxy of expected returns strongly predict the cross section of monthly future returns in all 18 equity markets. Fama-MacBeth regression tests yield prediction slopes of 1.3 on average. These findings suggest that an accounting-based valuation model provides a unifying framework for estimating firm-level expected rate of returns internationally.

Authors

• Charles CY Wang, Harvard University

• Matthew Lyle, Kellogg School of Management

• Akash Chattopadhyay, Harvard University