Are Cross-Sectional Predictors Good Market-Level Predictors?

Firm-level variables that predict cross-sectional stock returns, such as price-to-earnings and short interest, are often averaged and used to predict market returns. We extend this literature and limit the data-snooping bias by using a near-complete population of the literature’s cross-sectional return predictors. We find the literature has ignored several cross-sectional variables–such as asset turnover and Z-score–that contain strong in-sample predictability when examined in isolation. However, after accounting for the number of predictors and their interdependence, we find little evidence that cross-sectional predictors make good time-series predictors, especially out-of-sample.

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