What is the Chance that the Equity Premium Varies over Time? Evidence from Regressions on the Dividend-Price Ratio

63 Pages Posted: 20 Mar 2007 Last revised: 6 Jun 2013

See all articles by Jessica A. Wachter

Jessica A. Wachter

University of Pennsylvania - Finance Department; National Bureau of Economic Research (NBER)

Missaka Warusawitharana

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: June 4, 2013

Abstract

We examine the evidence on excess stock return predictability in a Bayesian setting in which the investor faces uncertainty about both the existence and strength of predictability. When we apply our methods to the dividend-price ratio, we find that even investors who are quite skeptical about the existence of predictability sharply modify their views in favor of predictability when confronted by the historical time series of returns and predictor variables. Correctly taking into account the stochastic properties of the regressor has a dramatic impact on inference, particularly over the 2000-2005 period.

Suggested Citation

Wachter, Jessica A. and Warusawitharana, Missaka, What is the Chance that the Equity Premium Varies over Time? Evidence from Regressions on the Dividend-Price Ratio (June 4, 2013). AFA 2008 New Orleans Meetings Paper, Available at SSRN: https://ssrn.com/abstract=972716 or http://dx.doi.org/10.2139/ssrn.972716

Jessica A. Wachter (Contact Author)

University of Pennsylvania - Finance Department ( email )

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Missaka Warusawitharana

Board of Governors of the Federal Reserve System ( email )

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