Past Market Returns Research Articles

Cross-Sectional Dispersion of Firm Valuations and Expected Stock Returns

Behavioral theories predict that firm valuation dispersion in the cross section (“dispersion”) measures aggregate overpricing caused by investor overconfidence and should be negatively related to expected aggregate returns. This paper develops and tests these hypotheses. Consistent with the model predictions, I find that measures of dispersion are positively related to aggregate valuations, trading volume, idiosyncratic volatility, past market returns, and current and future investor sentiment indexes. Dispersion is a strong negative predictor of subsequent shortand long-term market excess returns. Market beta is positively related to stock returns when the beginning-of-period dispersion is low and this relationship reverses when initial dispersion is high. A simple forecast model based on dispersion significantly outperforms a naive model based on historical equity premium in out-of-sample tests and the predictability is stronger in economic downturns.

Investor sentiment and the near-term stock market

We investigate investor sentiment and its relation to near-term stock market returns. We find that many commonly cited indirect measures of sentiment are related to direct measures (surveys) of investor sentiment. However, past market returns are also an important determinant of sentiment. Although sentiment levels and changes are strongly correlated with contemporaneous market returns, our tests show that sentiment has little predictive power for near-term future stock returns. Finally, our evidence does not support the conventional wisdom that sentiment primarily affects individual investors and small stocks.

Predictabilty of Aggregate Stock Market Returns: Evidence Based on Glamour Stocks

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.

Investor Sentiment And The Near-Term Stock Market

We investigate investor sentiment and its relation to near-term stock market returns. We find that many commonly-cited indirect measures of sentiment are related to direct measures (surveys) of investor sentiment. However, past market returns are also an important determinant of sentiment. Although sentiment changes are strongly correlated with contemporaneous market returns, our tests show that sentiment has little predictive power for near- term future stock returns. Finally, our evidence does not support the conventional wisdom that sentiment primarily affects individual investors and small stocks.