Understanding Cross-Sectional Stock Returns: What Really Matters?

We run a horse race among eight proposed factors and eight proposed conditioning variables for explaining the cross-section of stock returns. The purpose is to better understand which factors, in combination with which conditioning variables, seem robust in explaining cross-sectional data, and to seek an economic interpretation of the specifications that appear most promising. We find that a consumption growth factor, conditioning on lagged business income growth, is the most successful in explaining cross-sectional variation of average quarterly returns in the 25 Fama-French portfolios