Abstract
It is now well documented that returns on the aggregate stock market are predictable and negatively autocorrelated over longer investment horizons. In this paper, we investigate the predictability of the aggregate stock market returns using past returns of glamour and value stocks. We find the relationships between returns of glamour and value stocks with future stock market returns are quite different. In particular, we find that annual excess returns on the stock market index are negatively related to the returns of glamour stocks in the previous 36-month period. In contrast, the past returns of value stocks do not have any explanatory power in predicting aggregate stock market excess returns. Furthermore, stock market returns, which are purged of the effects of the glamour stocks, do not have any reliable predictive power in explaining the future stock market returns. In contrast, the glamour stocks have a predictive power even after controlling for the information in the past market returns. Our evidence of the unique predictive ability of glamour stocks seems to be inconsistent with the time-varying market risk-premium explanation for the predictability of the aggregate stock market returns.
Published Version
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