Evaluating Firm-Level Expected-Return Proxies

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Evaluating Firm-Level Expected-Return Proxies

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Title: Evaluating Firm-Level Expected-Return Proxies
Author: Lee, Charles M. C.; So, Eric C.; Wang, Changyi Chang-Yi

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Citation: Lee, Charles M.C., Eric C. So, and Charles C.Y. Wang. "Evaluating Firm-Level Expected-Return Proxies." Harvard Business School Working Paper, No. 15-022, October 2014.
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Abstract: We develop and implement a rigorous analytical framework for empirically evaluating the relative performance of firm-level expected-return proxies (ERPs). We show that superior proxies should closely track true expected returns both cross-sectionally and over time (that is, the proxies should exhibit lower measurement-error variances). We then compare five classes of ERPs nominated in recent studies to demonstrate how researchers can easily implement our two-dimensional evaluative framework. Our empirical analyses document a tradeoff between time-series and cross-sectional ERP performance, indicating the optimal choice of proxy may vary across research settings. Our results illustrate how researchers can use our framework to critically evaluate and compare a growing body of ERPs.
Terms of Use: This article is made available under the terms and conditions applicable to Open Access Policy Articles, as set forth at http://nrs.harvard.edu/urn-3:HUL.InstRepos:dash.current.terms-of-use#OAP
Citable link to this page: http://nrs.harvard.edu/urn-3:HUL.InstRepos:13350443
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