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Estimating earnings trend using unobserved components framework

  • Basistha, Arabinda
  • Kurov, Alexander

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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File URL: http://www.sciencedirect.com/science/article/B6V84-4Y0KWB4-1/2/29a33ab0621516ec4fe08b708ccea4ad
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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
Contact details of provider: Web page: http://www.elsevier.com/locate/ecolet

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  1. Charles Nelson & Eric Zivot, 2000. "Why are Beveridge-Nelson and Unobserved-Component Decompositions of GDP so Different?," Econometric Society World Congress 2000 Contributed Papers 0692, Econometric Society.
  2. 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.
  3. 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.
  4. Andrew Harvey, 2011. "Modelling the Phillips curve with unobserved components," Applied Financial Economics, Taylor & Francis Journals, vol. 21(1-2), pages 7-17.
  5. 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.
  6. 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.
  7. 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.
  8. 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.
  9. 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.
  10. Thomas Laubach, 2001. "Measuring The NAIRU: Evidence From Seven Economies," The Review of Economics and Statistics, MIT Press, vol. 83(2), pages 218-231, May.
  11. Chin Nam Low & Heather Anderson & Ralph Snyder, 2004. "Single Source of Error State Space Approach to the Beveridge Nelson Decomposition," Econometric Society 2004 Australasian Meetings 242, Econometric Society.
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