Using the Supply Side Approach to Understand and Estimate Stock Returns

25 Pages Posted: 6 Jun 2006

See all articles by Charles P. Jones

Charles P. Jones

North Carolina State University - Department of Business Management

Jack W. Wilson

North Carolina State University - Department of Business Management

Abstract

This paper uses the supply side approach developed by Ibbotson and Chen to analyze average stock returns for the period 1926-2004. Using the "earnings" model variation, it is easy to see how each component, including real earnings growth and the P/E ratio, contributed to the average total return on stocks. We estimate the long-run, sustainable average equity return as a benchmark expected equity return. Our innovation is to show how this model can be used by investors as a disciplined framework for estimating average equity returns over shorter periods of time. We illustrate how this can be done and note the assumptions and implications involved.

Keywords: supply side model, stock market returns, market forecasts

Suggested Citation

Jones, Charles P. and Wilson, Jack W., Using the Supply Side Approach to Understand and Estimate Stock Returns . Journal of Portfolio Management, Forthcoming, Available at SSRN: https://ssrn.com/abstract=906104

Charles P. Jones (Contact Author)

North Carolina State University - Department of Business Management ( email )

33B Nelson Hall
Campus Box 7229
Raleigh, NC 27695
United States
919-515-6940 (Phone)
919-515-6943 (Fax)

Jack W. Wilson

North Carolina State University - Department of Business Management ( email )

32A Nelson Hall
P.O. Box 7229
Raleigh, NC 27695
United States
919-515-4327 (Phone)
919-515-6943 (Fax)

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