Is the Value Spread a Good Predictor of Stock Returns? UK Evidence


  • Maria Michou

    1. The author is from the University of Edinburgh Business School. She would like to thank Peter Pope (editor) and the anonymous referee for their valuable and constructive comments. She is also very grateful to Pauline Weetman and Falconer Mitchell for helpful discussions and their helpful comments in revising the paper.
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* Address for correspondence: Maria Michou, University of Edinburgh Business School, University of Edinburgh, William Robertson Building, 50 George Square, Edinburgh EH8 9JY, UK.


Abstract:  This paper explores the predictive ability of the value spread in the UK. I replicate the US analysis of Liu and Zhang (2007) using UK data. In addition, I extend their work by exploring the predictive ability of the book-to-market, market-to-book and value spread on other size and value investment strategies, namely: large-caps only; small-caps minus large-caps (SML); value stocks only; growth stocks only; value stocks minus growth stocks (VMG) and a market portfolio that includes all stocks. The results are consistent with Liu and Zhang (2007) on the value spread. The value spread shows no predictive power for portfolio returns. Therefore, I show that the predictive power of book-to-market and market-to-book spreads depend on the portfolio formation strategies and the relative proportion of small-cap, large-cap, value and growth stocks in the portfolio.