Abstract:
We define GAP as the difference between the current level of gross profit and its moving average over the past eight quarters. The ordinary and weighted least sqaure Fama-MacBeth t-statistic associated with GAP exceeds 20.0 and 10.0, respectively. The new measure GAP dominates the estimated trend parameter TREND from Akbas, Jiang, and Koch (2017) in the cross-sectional regressions. We further estimate the newly developed instrumented principal component analysis (IPCA) models. The new measure GAP is a highly significant instrument for betas in latent factor models. In summary, we provide strong evidence that the stock market is rewarding incremental performance in gross profit relative to its moving average trend in the past eight quarters.
Contact Emails:
zlynne@ceibs.edu