What is the Chance that the Equity Premium Varies Over Time? Evidence from Regressions on the Dividend-Price Ratio

67 Pages Posted: 29 Aug 2011

See all articles by Jessica A. Wachter

Jessica A. Wachter

University of Pennsylvania - Finance Department; National Bureau of Economic Research (NBER)

Missaka Warusawitharana

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: August 2011

Abstract

We examine the evidence on excess stock return predictability in a Bayesian setting in which the investor faces uncertainty about both the existence and strength of predictability. When we apply our methods to the dividend-price ratio, we find that even investors who are quite skeptical about the existence of predictability sharply modify their views in favor of predictability when confronted by the historical time series of returns and predictor variables. Correctly taking into account the stochastic properties of the regressor has a dramatic impact on inference, particularly over the 2000-2005 period.

Suggested Citation

Wachter, Jessica A. and Warusawitharana, Missaka, What is the Chance that the Equity Premium Varies Over Time? Evidence from Regressions on the Dividend-Price Ratio (August 2011). NBER Working Paper No. w17334, Available at SSRN: https://ssrn.com/abstract=1918664

Jessica A. Wachter (Contact Author)

University of Pennsylvania - Finance Department ( email )

The Wharton School
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Missaka Warusawitharana

Board of Governors of the Federal Reserve System ( email )

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