A Comprehensive Look at the Empirical Performance of Equity Premium Prediction

59 Pages Posted: 30 Apr 2004  

Amit Goyal

University of Lausanne; Ecole Polytechnique Fédérale de Lausanne - Ecole Polytechnique Fédérale de Lausanne

Ivo Welch

University of California, Los Angeles (UCLA); National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: January 11, 2006

Abstract

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

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

Amit Goyal

University of Lausanne ( email )

Lausanne, Vaud CH-1015
Switzerland

Ecole Polytechnique Fédérale de Lausanne - Ecole Polytechnique Fédérale de Lausanne ( email )

c/o University of Geneve
40, Bd du Pont-d'Arve
1211 Geneva, CH-6900
Switzerland

Ivo Welch (Contact Author)

University of California, Los Angeles (UCLA) ( email )

110 Westwood Plaza
C519
Los Angeles, CA 90095-1481
United States
310-825-2508 (Phone)

HOME PAGE: http://www.ivo-welch.info

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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