Proxying for Expected Returns with Price Earnings Ratios
Posted: 27 Apr 2005
There are 2 versions of this paper
Proxying for Expected Returns with Price Earnings Ratios
Number of pages: 10
Posted: 19 Oct 2004
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Abstract
Long-run regression models using the trailing earnings over price ratio to predict future returns suggested by Campbell and Shiller (1988, 2001) work quite well. However, in this note, we show that this variable might result in a downward biased proxy for expected future returns. Instead, we suggest using a moving average of the log of 1 plus the earnings price ratio when forecasting long-run returns. The empirical results for the S&P 500 show the superiority of our approach to existing ones.
Keywords: Earnings yield, stock return, forecasting
JEL Classification: C52, G12, G14
Suggested Citation: Suggested Citation
Hansen, Charlotte Strunk and Tuypens, Bjorn, Proxying for Expected Returns with Price Earnings Ratios. Available at SSRN: https://ssrn.com/abstract=708163
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