Using the Supply Side Approach to Understand and Estimate Stock Returns
25 Pages Posted: 6 Jun 2006
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
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