59 Pages Posted: 30 Apr 2004
Date Written: January 11, 2006
Economists have suggested a whole range of variables that predict the equity premium: dividend price ratios, dividend yields, earnings-price ratios, dividend payout ratios, corporate or net issuing ratios, book-market ratios, beta premia, interest rates (in various guises), and consumption-based macroeconomic ratios (cay). Our paper comprehensively reexamines the performance of these variables, both in-sample and out-of-sample, as of 2005. We find that [a] over the last 30 years, the prediction models have failed both in-sample and out-of-sample; [b] the models are unstable, in that their out-of-sample predictions have performed unexpectedly poorly; [c] the models would not have helped an investor with access only to information available at the time to time the market.
Keywords: Equity Premium, Prediction, Stock Market
JEL Classification: G12, G14
Suggested Citation: Suggested Citation
Goyal, Amit and Welch, Ivo, A Comprehensive Look at the Empirical Performance of Equity Premium Prediction (January 11, 2006). Yale ICF Working Paper No. 04-11. Available at SSRN: https://ssrn.com/abstract=517667