Proxying for Expected Returns with Price Earnings Ratios

Posted: 27 Apr 2005

See all articles by Charlotte Strunk Hansen

Charlotte Strunk Hansen

Platinum Grove Asset Management L.P.

Bjorn Tuypens

affiliation not provided to SSRN

Multiple version iconThere are 2 versions of this paper

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

Hansen, Charlotte Strunk and Tuypens, Bjorn, Proxying for Expected Returns with Price Earnings Ratios. Available at SSRN: https://ssrn.com/abstract=708163

Charlotte Strunk Hansen (Contact Author)

Platinum Grove Asset Management L.P. ( email )

Reckson Executive Park, Building 4
1100 King Street
Rye Brook, NY 10573

Bjorn Tuypens

affiliation not provided to SSRN

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