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Proxying for Expected Returns with Price Earnings Ratios

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Author Info

  • Charlotte S. Hansen

    (Zicklin School of Business,Baruch College/CUNY)

  • Bjorn E. Tuypens

    (Oak Hill Platinum Partners, L.L.C.)

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.

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File URL: http://128.118.178.162/eps/fin/papers/0410/0410019.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Finance with number 0410019.

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Length: 10 pages
Date of creation: 28 Oct 2004
Date of revision:
Handle: RePEc:wpa:wuwpfi:0410019

Note: Type of Document - pdf; pages: 10
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Web page: http://128.118.178.162

Related research

Keywords: Earnings yield; Stock Return; Forecasting;

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References

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  1. John Y. Campbell & Robert J. Shiller, 2001. "Valuation Ratios and the Long-run Stock Market Outlook: An Update," Cowles Foundation Discussion Papers 1295, Cowles Foundation for Research in Economics, Yale University.
  2. Wayne E. Ferson & Sergei Sarkissian & Timothy Simin, 2002. "Spurious Regressions in Financial Economics?," NBER Working Papers 9143, National Bureau of Economic Research, Inc.
  3. Charlotte S. Hansen & Bjorn E. Tuypens, 2004. "Long-Run Regressions: Theory and Application to US Asset Markets," Finance 0410018, EconWPA.
  4. Fair, Ray C & Shiller, Robert J, 1990. "Comparing Information in Forecasts from Econometric Models," American Economic Review, American Economic Association, vol. 80(3), pages 375-89, June.
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Cited by:
  1. Charlotte S. Hansen & Bjorn E. Tuypens, 2004. "Long-Run Regressions: Theory and Application to US Asset Markets," Finance 0410018, EconWPA.

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