Predicting Returns with Financial Ratios

35 Pages Posted: 2 Oct 2002

See all articles by Jonathan Lewellen

Jonathan Lewellen

Dartmouth College - Tuck School of Business; National Bureau of Economic Research (NBER)

Date Written: August 2002

Abstract

This article provides a new test of the predictive ability of aggregate financial ratios. Predictive regressions are subject to small-sample biases, but the correction in previous studies can substantially understate forecasting power. Dividend yield predicts aggregate market returns from 1946 - 2000, as well as in various subperiods. Book-to-market and the earnings-price ratio predict returns during the shorter 1963 - 2000 sample. The evidence remains strong despite the unusual price run-up in recent years.

Keywords: Predictive Regressions, Expected Returns, Small-sample Bias

Suggested Citation

Lewellen, Jonathan W., Predicting Returns with Financial Ratios (August 2002). MIT Sloan Working Paper No. 4374-02. Available at SSRN: https://ssrn.com/abstract=309559 or http://dx.doi.org/10.2139/ssrn.309559

Jonathan W. Lewellen (Contact Author)

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States
603-646-8650 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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