The cross section of expected holding period returns and their dynamics: A present value approach

Matthew R. Lyle, Charles C.Y. Wang*

*Corresponding author for this work
18 Scopus citations


We provide a tractable model of firm-level expected holding period returns using two firm fundamentals-book-to-market ratio and return on equity-and study the cross-sectional properties of the model-implied expected returns. We find that firm-level expected returns and expected profitability are time-varying but highly persistent and that forecasts of holding period returns strongly predict the cross section of future returns up to three years ahead. We show a highly significant predictive pooled regression slope for future quarterly returns of 0.86. The popular factor-based expected return models have either an insignificant or a significantly negative association with future returns. In supplemental analyses, we show that these forecasts are also informative of the time series variation in aggregate conditions. For a representative firm, the slope of the conditional expected return curve is more positive in good times, when expected short-run returns are relatively low, and the model-implied forecaster of aggregate returns exhibits modest predictive ability. Collectively, we provide a simple, theoretically motivated, and practically useful approach to estimating multi-period-ahead expected returns.

Original languageEnglish (US)
Pages (from-to)505-525
Number of pages21
JournalJournal of Financial Economics
Issue number3
StatePublished - Jun 1 2015


  • Accounting data
  • Discount rates
  • Expected returns
  • Fundamental valuation
  • Holding period returns
  • Present value

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics
  • Strategy and Management


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