Conditioning Variables and the Cross Section of Stock Returns


  • Wayne E. Ferson,

  • Campbell R. Harvey

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    • Ferson is the Pigott-PACCAR Professor of Finance at the University of Washington and a Research Associate of the National Bureau of Economic Research (NBER). Harvey is the J. Paul Sticht Professor of International Business at Duke University, and a Research Associate of the NBER. We are grateful to Jonathan Berk, Chris Blake, Mark Carhart, Raymond Kan, Robert Korajczyk, Jay Shanken, Chu Zhang, and an anonymous referee for helpful comments and data. A. Roper provided research assistance. Ferson acknowledges financial support from the Pigott-PACCAR professorship at the University of Washington. Part of this work was completed while Ferson was a Visiting Scholar at the University of Miami. The paper has also benefited from workshops at the University of Miami, the University of Washington, the 1998 Conference on Financial Economics and Accounting, and the 1999 American Finance Association Meetings. (c) 1996, 1997, 1998, 1999 by Wayne E. Ferson and Campbell R. Harvey.


Previous studies identify predetermined variables that predict stock and bond returns through time. This paper shows that loadings on the same variables provide significant cross-sectional explanatory power for stock portfolio returns. The loadings are significant given the three factors advocated by Fama and French (1993) and the four factors of Elton, Gruber, and Blake (1995). The explanatory power of the loadings on lagged variables is robust to various portfolio grouping procedures and other considerations. The results carry implications for risk analysis, performance measurement, cost-of-capital calculations, and other applications.