The Good News and the Bad News About Long-Run Stock Market Returns

44 Pages Posted: 5 Nov 1998

See all articles by Stephen H. Wright

Stephen H. Wright

Birkbeck College, University of London

Donald Robertson

Cambridge University - Department of Economics

Date Written: October 1998

Abstract

If stock prices followed a random walk, uncertainty about future stock prices would be so great that the observed bias towards equities in long-term investment portfolios would be surprising. The good news is that if, as a growing body of research suggests, there is even a weak tendency for stationary valuation indicators to predict future stock prices, long-run returns can become markedly more predictable. We illustrate this in a cointegrating VAR, with Tobin's "q" as one of the cointegrating relations. The bad news is a corollary of the good news: "q" and most other indicators point to massive overvaluation at end-1997, and hence the prospect of weak stock prices well into the next century.

JEL Classification: C32, C52, E44, G10, G14

Suggested Citation

Wright, Stephen H. and Robertson, Donald, The Good News and the Bad News About Long-Run Stock Market Returns (October 1998). EFA 0305; DAE Working Paper No. 9822. Available at SSRN: https://ssrn.com/abstract=138170 or http://dx.doi.org/10.2139/ssrn.138170

Stephen H. Wright (Contact Author)

Birkbeck College, University of London ( email )

Malet St
London, WC1 E7HX
United Kingdom

Donald Robertson

Cambridge University - Department of Economics ( email )

Sidgwick Avenue
Cambridge, CB3 9DE
United Kingdom
+44 1223 335275 (Phone)
+44 1223 335475 (Fax)

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