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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.)

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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://129.3.20.41/eps/fin/papers/0410/0410019.pdf
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Publisher 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://129.3.20.41

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Related research
Keywords: Earnings yield; Stock Return; Forecasting;

Other versions of this item:

Find related papers by JEL classification:
C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation and Testing
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. 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. [Downloadable!] (restricted)
    Other versions:
  2. 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. [Downloadable!] (restricted)
  3. Wayne E. Ferson & Sergei Sarkissian & Timothy Simin, 2002. "Spurious Regressions in Financial Economics?," NBER Working Papers 9143, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. Charlotte S. Hansen & Bjorn E. Tuypens, 2004. "Long-Run Regressions: Theory and Application to US Asset Markets," Finance 0410018, EconWPA. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Charlotte S. Hansen & Bjorn E. Tuypens, 2004. "Long-Run Regressions: Theory and Application to US Asset Markets," Finance 0410018, EconWPA. [Downloadable!]
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