The value spread

Authors decompose the cross-sectional variance of firms book-to-market ratios using both a long U.S. panel and a shorter international panel. In contrast to typical aggregate time-series results, transitory cross-sectional variation in expected 15-year stock returns causes only a relatively small fraction (20-25 percent) of the total cross-sectional variance. The remaining dispersion can be explained by expected 15-year profitability and persistence of valuation levels. Furthermore, this fraction appears stable across time and across types of stocks. They also showed that the expected return on value-minus-growth strategies is atypically high at times when the value spread (the difference between the book-to-market ratio of a typical value stock and a typical growth stock) is wide.

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