Abstract

https://ssrn.com/abstract=422901
 
 

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Citations (51)



 


 



New Forecasts of the Equity Premium


Christopher Polk


London School of Economics

Samuel Brodsky Thompson


Arrowstreet Capital, L.P.

Tuomo Vuolteenaho


Arrowstreet Capital, LP; National Bureau of Economic Research (NBER)

March 17, 2004

AFA 2005 Philadelphia Meetings

Abstract:     
If investors are myopic mean-variance optimizers, a stock's expected return is linearly related to its beta in the cross section. The slope of the relation is the cross-sectional price of risk, which should equal the expected equity premium. We use this simple observation to forecast the equity-premium time series with the cross-sectional price of risk. We also introduce novel statistical methods for testing stock-return predictability based on endogenous variables whose shocks are potentially correlated with return shocks. Our empirical tests show that the cross-sectional price of risk (1) is strongly correlated with the market's yield measures and (2) predicts equity-premium realizations especially in the first half of our 1927-2002 sample.

Keywords: risk premium, beta, bias, size, conditional test

Number of Pages in PDF File: 56

Keywords: risk premium, beta, bias, size, conditional test

JEL Classification: C12, G12, G14


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Date posted: January 10, 2005  

Suggested Citation

Polk, Christopher and Thompson, Samuel Brodsky and Vuolteenaho, Tuomo, New Forecasts of the Equity Premium (March 17, 2004). AFA 2005 Philadelphia Meetings. Available at SSRN: https://ssrn.com/abstract=422901 or http://dx.doi.org/10.2139/ssrn.422901

Contact Information

Christopher Polk
London School of Economics ( email )
United Kingdom
HOME PAGE: http://personal.lse.ac.uk/polk/
Samuel Brodsky Thompson
Arrowstreet Capital, L.P. ( email )
44 Brattle St., 5th Floor
Cambridge, MA 02138
United States
617 349 2254 (Phone)
Tuomo Vuolteenaho (Contact Author)
Arrowstreet Capital, LP ( email )
44 Brattle St., 5th Floor
Cambridge, MA 02138
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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