We show that returns to value strategies in individual equities, industries, commodities, currencies, global government bonds, and global stock indexes are predictable in the time series by their respective value spreads. In all these asset classes, expected value returns vary by at least as much as their unconditional level. A single common component of the value spreads captures about two-thirds of value return predictability and the remainder is asset-class-specifc. We argue that common variation in value premia is consistent with rationally time-varying expected returns, because (i) common value is closely associated with standard proxies for risk premia, such as the dividend yield, intermediary leverage and illiquidity, and (ii) value premia are globally high in bad times.

Using an information set of firm-level characteristics and aggregate-variables, we show that stock returns as far out as ten years are predictable using a neural network forecasting model. The strength of this predictability is highest in the short-run and falls with horizon. We disentangle the nature of these forecasts and show that most of the predictability we uncover comes from predicting the dominant factor in the pool of stocks; the equally weighted market return. We find that time-series variation in relative stock returns is only predictable in the short-run, consistent with the fact that longer-term discount rates do not vary much across firms. Finally, we show that a neural network model that closely adheres to economic theory generates forecasts that more robustly predict returns to the aggregate market and long-short characteristic sorted portfolios.

We study the returns to characteristic-sorted portfolios up to five years after portfolio formation. Among a set of 56 characteristics, we find large pricing errors between the contemporaneous returns of new and old sorts, where new sorts use only the most recent observations of firm characteristics. These relative pricing errors are not captured by existing asset pricing models and have been overlooked by standard tests using only returns to new sorts. Thus, pricing errors across horizons provide new and powerful information to test asset pricing models. Further, we show that these pricing errors are strongly related to a characteristic’s market beta and connected to the difference in return between new and old stocks in the characteristic-sorted portfolios. We argue that investors can improve the performance of characteristic-based strategies by considering past observations of firm characteristics.