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Inferring Aggregate Market Expectations from the Cross Section of Stock Prices
Resource type
Authors/contributors
- Bali, Turan G. (Author)
- Nichols, D. Craig (Author)
- Weinbaum, David (Author)
Title
Inferring Aggregate Market Expectations from the Cross Section of Stock Prices
Abstract
We introduce a new approach to estimating long-term aggregate discount rates using the cross section of earnings and book values to explain current stock prices and extract expected market returns. The proposed discount rate measure is countercyclical. Shocks to it account for nearly half of historical market return variation; in contrast, shocks to other discount rate measures account for no more than 2%. It dominates other measures in explaining time-series variation in returns on duration-sorted portfolios and delivers out-of-sample predictability that exceeds that afforded by other expected return measures and predictive variables. It also performs well in international equity markets.
Publication
Journal of Financial and Quantitative Analysis
Volume
59
Issue
3
Pages
1064-1099
Date
2024/05
Language
en
ISSN
0022-1090, 1756-6916
Accessed
6/17/24, 9:32 AM
Library Catalog
Cambridge University Press
Citation
Bali, T. G., Nichols, D. C., & Weinbaum, D. (2024). Inferring Aggregate Market Expectations from the Cross Section of Stock Prices. Journal of Financial and Quantitative Analysis, 59, 1064–1099.
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