Aalto University School of Business
P.O.Box 21210, FI-00076 Aalto
Institutional Affiliation: Aalto University
NBER Working Papers and Publications
|February 2019||Long-Term Discount Rates Do Not Vary Across Firms|
with Matti Keloharju, Juhani T. Linnainmaa: w25579
Long-term expected returns appear to vary little, if at all, in the cross section of stocks. We devise a bootstrapping procedure that injects small amounts of variation into expected returns and show that even negligible differences in expected returns, if they existed, would be easy to detect. Markers of such differences, however, are absent from actual stock returns. Our estimates are consistent with production-based asset pricing models such as Berk, Green, and Naik (1999) and Gomes, Kogan, and Zhang (2003) in which firms' risks change over time. We show that long-term reversals in stock returns are the consequence of the rapid convergence in expected returns. Our results imply stock market anomalies have only a limited effect on firm valuations.
|December 2014||Common Factors in Return Seasonalities|
with Matti Keloharju, Juhani T. Linnainmaa: w20815
A strategy that selects stocks based on their historical same-calendar-month returns earns an average return of 13% per year. We document similar return seasonalities in anomalies, commodities, international stock market indices, and at the daily frequency. The seasonalities overwhelm unconditional differences in expected returns. The correlations between different seasonality strategies are modest, suggesting that they emanate from different common factors. Our results suggest that seasonalities are not a distinct class of anomalies that requires an explanation of its own---rather, they are intertwined with other return anomalies through shared common factors. A theory that is able to explain the risks behind any common factor is thus likely able to explain a part of the seasonalities.