Is the Value Spread a Useful Predictor of Returns?

Abstract

No. Two related variables, the book-to-market spread (the book-to-market of value stocks minus the book-to-market of growth stocks) and the market-to-book spread (the market-to-book of growth stocks minus the market-to-book of value stocks) predict returns but with opposite signs. The value spread mixes the cyclical variations of the book-to-market and market-to-book spreads, and appear much less useful in predicting returns. Our evidence casts doubt on recent studies that rely critically on using the value spread to predict aggregate stock returns.