by Robert A. Haugen and Nardin L. Baker
Journal of Financial Economics




-- Abstract --
Evidence is presented that the determinants of the cross-section of expected stock returns are stable
in their identity and influence from period to period and from country to country. The determinants
are related to risk, liquidity, price-level, growth potential, and stock price history. Out-of-sample
predictions of expected return, using moving average values for the payoffs to these firm
characteristics, are strongly and consistently accurate. Two findings, however, distinguish this paper
from others in the contemporary literature. First, the stocks with higher expected and realized rates
of return are unambiguously of lower risk than the stocks with lower returns. Second, we find that
the important determinants of expected stock returns are strikingly common to the major equity
markets of the world. Given the nature of the tests, it is highly unlikely that these results may be
attributed to bias or data snooping. Consequently, the results seem to reveal a major failure in the
Efficient Markets Hypothesis.