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The Good News and the Bad News about Long-run Stock Market Returns

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Abstract

If stock prices followed a random walk, uncertainty about future stock prices would be so great that the observed bias towards equities in long-term investment portfolios would be surprising. The good news is that if, as a growing body of research suggests, there is even a weak tendency for stationary valuation indicators to predict future stock prices, long-run returns can become markedly more predictable. This is illustrated in a cointegrating VAR, with Tobin?s q as one of the cointegrating relations. The bad news is a corollary of the good news: q and most other indicators point to massive at the end of 1997, and hence the prospect of weak stock prices well into the next century.

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Bibliographic Info

Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 9822.

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Date of creation: Oct 1998
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Handle: RePEc:cam:camdae:9822

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Web page: http://www.econ.cam.ac.uk/index.htm

Related research

Keywords: Stock prices; Random walk; Cointegration; Vector autoregressions; Tobin's q; Efficiency;

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References

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Cited by:
  1. Pierre Lafourcade, 2004. "Valuation, investment and the pure profit share," Finance and Economics Discussion Series 2004-08, Board of Governors of the Federal Reserve System (U.S.).
  2. Anthony Garratt & Donald Robertson & Stephen Wright, 2004. "Inside the black box: permanent vs transitory components and economic fundamentals," Money Macro and Finance (MMF) Research Group Conference 2003 35, Money Macro and Finance Research Group.

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