Estimating Earnings Trend Using Unobserved Components Framework
10 Pages Posted: 9 Dec 2009 Last revised: 17 Dec 2009
Date Written: December 15, 2009
Regressions for predicting long-term stock returns often use moving averages of earnings to proxy for unobserved future earnings. We show that the earnings trend can be directly estimated using unobserved components models. Valuation ratios based on the estimated trends improve the fit of stock return predictive regressions.
Keywords: Valuation ratios, Unobserved components model
JEL Classification: C22, C51, G12, G14
Suggested Citation: Suggested Citation