Conditioning variables and the cross section of stock returns

Previous studies identify predetermined variables that predict stock and bo nd returns through time. This paper shows that loadings on the same variabl es provide significant cross-sectional explanatory power for stock portfoli o returns. The loadings are significant given the three factors advocated b y Fama and French (1993) and the four factors of Elton, Gruber, and Blake ( 1995). The explanatory power of the loadings on lagged variables is robust to various portfolio grouping procedures and other considerations. The resu lts carry implications for risk analysis, performance measurement, cost-of- capital calculations, and other applications.