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RFS Advance Access originally published online on March 2, 2008
Review of Financial Studies 2008 21(3):1297-1338; doi:10.1093/rfs/hhn011
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© The Author 2008. Published by Oxford University Press on behalf of the Society for Financial Studies. All rights reserved. For permissions, please e-mail: journals.permissions@oxfordjournals.org.

Expected returns, yield spreads, and asset pricing tests

Murillo Campello
University of Illinois and NBER

Long Chen
Michigan State University

Lu Zhang
University of Michigan and NBER

Address correspondence to Lu Zhang, Finance Department, Stephen M. Ross School of Business, University of Michigan, 701 Tappan, ER 7605 Bus Ad, Ann Arbor, MI 48109-1234; telephone: (734) 615-4854; fax: (734) 936-0282; e-mail: zhanglu{at}bus.umich.edu

JEL Classification: G12, E44


  Abstract

We construct firm-specific measures of expected equity returns using corporate bond yields, and replace standard ex postaverage returns with our expected-return measures in asset pricing tests. We find that the market beta is significantly priced in the cross section of expected returns. The expected size and value premiums are positive and countercyclical, but there is no evidence of positive expected momentum profits.

For helpful comments, we thank John Ammer, Mike Barclay, Dan Bernhardt, Lawrence Booth, Raymond Kan, Jason Karceski, Naveen Khana, Mark Schroder, Jay Shanken (AFA discussant), Jerry Warner, Jason Wei, Jim Wiggins, Tong Yao, Guofu Zhou, and seminar participants at University of Notre Dame, the 2005 American Finance Association annual meetings, and the 2005 Federal Reserve Risk Premium Conference. We are especially indebted to Cam Harvey (the editor) and an anonymous referee for their extensive comments that have greatly helped improve the paper. We are responsible for all the remaining errors.


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