A Comprehensive Look at the Empirical Performance of Equity Premium Prediction
University of Lausanne; Swiss Finance Institute
University of California, Los Angeles (UCLA); National Bureau of Economic Research (NBER)
January 11, 2006
Yale ICF Working Paper No. 04-11
Economists have suggested a whole range of variables that predict the equity premium: dividend price ratios, dividend yields, earnings-price ratios, dividend payout ratios, corporate or net issuing ratios, book-market ratios, beta premia, interest rates (in various guises), and consumption-based macroeconomic ratios (cay). Our paper comprehensively reexamines the performance of these variables, both in-sample and out-of-sample, as of 2005. We find that [a] over the last 30 years, the prediction models have failed both in-sample and out-of-sample; [b] the models are unstable, in that their out-of-sample predictions have performed unexpectedly poorly; [c] the models would not have helped an investor with access only to information available at the time to time the market.
Number of Pages in PDF File: 59
Keywords: Equity Premium, Prediction, Stock Market
JEL Classification: G12, G14working papers series
Date posted: April 30, 2004
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