This article develops and estimates a simple model for monthly expected stock returns that relies on the rapidly decaying structure of shorter-horizon (weekly) expected returns. The most striking aspect of our finds is that the rapid mean reversion in short-horizon expected returns implies much greater variation through time in monthly expected returns than has been documented in earlier studies. For instance, during the 1962 to 1985 period, over 25 percent of the return variance of small firms can be explained by time variation in expected returns.

This paper analyzes the impact of changes in monetary policy regimes on the relation between stock returns and changes in expected inflation. Post-war evidence from four countries reveals a direct link between these relations and the central banks' operating targets (i.e., money supply or interest rates). Specifically, the post-war negative relations between stock returns and changes in expected inflation are significantly stronger during interest rate regimes.

We show that there is an asymmetry in the predictability of the volatilities of large versus small firms. Using both univariate and multivariate ARMA–GARCH-M parameterizations, we find that volatility surprises to large market value firms are important to the future dynamics of their own returns as well as the returns of smaller firms. Conversely, however, shocks to smaller firms have no impact on the behavior of either the mean or the variance of the returns of larger capitalization companies.

In this article we use a single unifying framework to analyze the sources of profits to a wide spectrum of return-based trading strategies implemented in the literature. We show that less than 50% of the 120 strategies implemented in the article yield statistically significant profits and, unconditionally, momentum and contrarian strategies are equally likely to be successful. However, when we condition on the return horizon (short, medium, or long) of the strategy, or the time period during which it is implemented, two patterns emerge. A momentum strategy is usually profitable at the medium (3- to 12-months) horizon, while a contrarian strategy nets statistically significant profits at long horizons, but only during the 1926–1947 subperiod. More importantly, our results show that the cross-sectional variation in the mean returns of individual securities included in these strategies play an important role in their profitability. The cross-sectional variation can potentially account for the profitability of momentum strategies and it is also responsible for attenuating the profits from price reversals to long-horizon contrarian strategies.

We show that the returns to the typical long‐term contrarian strategy implemented in previous studies are upwardly biased because they are calculated by cumulating single‐period (monthly) returns over long intervals. The cumulation process not only cumulates “true” returns but also the upward bias in single‐period returns induced by measurement errors. We also show that the remaining “true” returns to loser or winner firms have no relation to overreaction. This study has important implications for event studies that use cumulative returns to assess the impact of information events.

We show that the returns to the typical long-term contrarian strategy implemented in previous studies are upwardly biased because they are calculated by cumulating single-period (monthly) returns over long intervals. The cumulation process not only cumulates “true” returns but also the upward bias in single-period returns induced by measurement errors. We also show that the remaining “true” returns to loser or winner firms have no relation to overreaction. This study has important implications for event studies that use cumulative returns to assess the impact of information events.

We test whether the reaction of international stock markets to oil shocks can be justified by current and future changes in real cash flows and/or changes in expected returns. We find that in the postwar period, the reaction of United States and Canadian stock prices to oil shocks can be completely accounted for by the impact of these shocks on real cash flows alone. In contrast, in both the United Kingdom and Japan, innovations in oil prices appear to cause larger changes in stock prices than can be justified by subsequent changes in real cash flows or by changing expected returns.

In this paper, we investigate the effects of relative price variability on output and the stock market and gauge the extent to which inflation proxies for relative price variability in stock return‐inflation regressions. The evidence shows that the negative stock return‐inflation relations proxy for the adverse effects of relative price variability on economic activity, particularly during the seventies, when the U.S. experienced oil supply shocks. Hence, it appears that inflation spuriously affects the stock market in two ways: the aggregate output link of Fama (1981) and the supply shocks reflected in relative price variability.

We show that bid-ask errors in transaction prices are the predominant source of apparent price reversals in the short run for NASDAQ firms. Once we extract measurement errors in prices caused by the bid-ask spread, we find little evidence of market overreaction. On the contrary, we find that security returns are positively, and not negatively, autocorrelated. We also show that bid-ask errors lead to substantial spurious volatility in transaction returns; about half of measured daily return variances can be induced by the bid-ask effect.