Forecasting Cross-Section Stock Returns using The Present Value Model

We contribute to the debate over whether forecastable stock returns reflect an unexploited profit opportunity or rationally reflect risk differentials. We test whether agents could earn excess returns by selecting stocks which have a low market price compared to an estimate of the fundamental value obtained from the present value model. The criterion for stock picking is one which could actually have been implemented by agents in real time. We show that statistically significant, and quantitatively substantial, excess returns are delivered by portfolios of stocks which are cheap relative to our estimate of fundamental value. There is no evidence that the under priced stocks are relatively risky and hence excess returns cannot easily be interpreted as an equilibrium compensation for risk.Excess returns, Trading rule, Efficient markets, Present value model, Stock prices.

Stock Returns Following Profit Warnings: A Test of Models of Behavioural Finance.

Models in behavioural finance have been developed to explain apparent anomalies in stock returns. A property common to a number of these models is that agents under react in the short run to public signals about future earnings. This contrasts sharply with the popular informal belief that stock prices overreact to news. A behavioural model also predicts returns reversals over longer horizons. We examine stock returns following profit warnings to test which, if any, of these hypotheses stands up to scrutiny on a new data set which was generated by a process which corresponds closely to that assumed in the behavioural models.

Can the Cross-Sectional Variation in Expected Stock Returns Explain Momentum?

To be published in Journal of financial and quantitative analysis, 200

How stable is the underlying process of stock prices? Empirical evidence of structural breaks in the firm-level dividend of the U.S. firms

In this paper, we present empirical evidence of instability in the form of structural breaks in dividend at the firm level of the U.S. firms. We perform the Bai and Perron (2003) structural break program that estimates multiple breaks based on deterministic econometric approach. We also observe for links between any specific episodes in the economic and financial history of the U.S and structural breaks detected in the dividend process of the U.S firms

Excessive stock price dispersion: a regression test of cross-sectional volatility

In this paper we apply a regression test of the volatility of asset prices to a cross-section data set of US stock prices each year between 1932-71. We show that the rejection of REEM in the time series domain carries over to a data set consisting of observations on a cross-section of individual share prices within a particular year, and we refer to this phenomena as excess dispersion of stock prices. In nearly all of the years over the period 1932-1971 we find that stock prices are excessively dispersed. This finding is consistent with the existence of a firm specific bubble which drives a wedge between the values of pt* and pt. We go on to examine the relationship between the mis-pricing and market fundamentals which we take to be related to past dividends. Assuming that dividend yields proxy for growth expectations we find that investors are unduly optimistic about high growth stocks and too pessimistic about low expected growth stocks. These results support Lakonishok, Shleifer and Vishney's (1994) contention that contrarian investment strategies outperform the market because market participants have consistently overestimated future growth rates of glamour stocks relative to value stocks