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Estimating earnings trend using unobserved components framework

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  • Basistha, Arabinda
  • Kurov, Alexander

Abstract

Regressions for predicting long-term stock returns often use moving averages of earnings as the earnings trend. We show that the earnings trend can be directly estimated using unobserved components models. The estimated trends improve the fit of predictive regressions.

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Bibliographic Info

Article provided by Elsevier in its journal Economics Letters.

Volume (Year): 107 (2010)
Issue (Month): 1 (April)
Pages: 55-57

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Handle: RePEc:eee:ecolet:v:107:y:2010:i:1:p:55-57

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Web page: http://www.elsevier.com/locate/ecolet

Related research

Keywords: Valuation ratios Unobserved components model;

References

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  1. Malcolm Baker & Jeffrey Wurgler, 2006. "Investor Sentiment and the Cross-Section of Stock Returns," Journal of Finance, American Finance Association, vol. 61(4), pages 1645-1680, 08.
  2. Clark, Peter K, 1987. "The Cyclical Component of U.S. Economic Activity," The Quarterly Journal of Economics, MIT Press, vol. 102(4), pages 797-814, November.
  3. Ord, J.K. & Koehler, A. & Snyder, R.D., 1995. "Estimation and Prediction for a Class of Dynamic Nonlinear Statistical Models," Monash Econometrics and Business Statistics Working Papers 4/95, Monash University, Department of Econometrics and Business Statistics.
  4. Thomas Laubach, 1997. "Measuring the NAIRU : evidence from seven economies," Research Working Paper 97-13, Federal Reserve Bank of Kansas City.
  5. Heather M. Anderson & Chin Nam Low & Ralph Snyder, 2004. "Single Source of Error State Space Approach to the Beveridge Nelson Decomposition," Monash Econometrics and Business Statistics Working Papers 21/04, Monash University, Department of Econometrics and Business Statistics.
  6. Gregory W. Brown & Michael T. Cliff, 2005. "Investor Sentiment and Asset Valuation," The Journal of Business, University of Chicago Press, vol. 78(2), pages 405-440, March.
  7. Andrew Harvey, 2011. "Modelling the Phillips curve with unobserved components," Applied Financial Economics, Taylor & Francis Journals, vol. 21(1-2), pages 7-17.
  8. John Y. Campbell & Robert J. Shiller, 2001. "Valuation Ratios and the Long-Run Stock Market Outlook: An Update," NBER Working Papers 8221, National Bureau of Economic Research, Inc.
  9. James Morley & Charles Nelson & Eric Zivot, 2003. "Why are Beveridge-Nelson and Unobserved-component decompositions of GDP so Different?," Working Papers UWEC-2002-18-P, University of Washington, Department of Economics.
  10. Beveridge, Stephen & Nelson, Charles R., 1981. "A new approach to decomposition of economic time series into permanent and transitory components with particular attention to measurement of the `business cycle'," Journal of Monetary Economics, Elsevier, vol. 7(2), pages 151-174.
  11. Hamilton, James D., 1986. "A standard error for the estimated state vector of a state-space model," Journal of Econometrics, Elsevier, vol. 33(3), pages 387-397, December.
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