WORKING PAPER

Conditioning Variables and the Cross-Section of Stock Returns

Wayne E. Ferson
University of Washington, Seattle, WA 98195
National Bureau of Economic Research, Cambridge, MA 02138

Campbell R. Harvey
Duke University, Durham, NC 27708
National Bureau of Economic Research, Cambridge, MA 02138

Abstract

This paper shows that a common set of predetermined instruments from a the conditional asset pricing literature provide significant explanatory power for stock returns, over and above the variables advocated by Fama and French (1993) in their three factor model. Time-series and cross-sectional evidence show s that the Fama-French variables do not provide a reliable description of expected returns, even on a sample of portfolios similar to their original study. The evidence suggests that a missing factor is related to interest rates.