Expected Returns and Risk in the Stock Market

Research output: Working paper


We present new evidence on the predictability of aggregate market returns by developing two new prediction models, one risk-based, and the other purely statistical. The pricing kernel model expresses the expected return as the covariance of the market return with a pricing kernel that is a linear function of portfolio returns. The discount rate model predicts the expected return directly as a function of weighted past portfolio returns. These models provide independent evidence of predictability, with R2 of 16-19% for 1-year returns. We show that innovations in the pricing kernel are associated with the cash flow component of the market return.
Original languageEnglish
PublisherSocial Science Research Network
Number of pages58
Publication statusPublished - 9 Feb 2019


  • Predictability
  • Expected Market Returns
  • Risk


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