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Predicting Returns With Financial Ratios

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  • Lewellen, Jonathan

Abstract

This article provides a new test of the predictive ability of aggregate financial ratios. Predictive regressions are subject to small-sample biases, but the correction in previous studies can substantially understate forecasting power. Dividend yield predicts aggregate market returns from 1946 Â€Ó 2000, as well as in various subperiods. Book-to-market and the earnings-price ratio predict returns during the shorter 1963 Â€Ó 2000 sample. The evidence remains strong despite the unusual price run-up in recent years

Suggested Citation

  • Lewellen, Jonathan, 2003. "Predicting Returns With Financial Ratios," Working papers 4374-02, Massachusetts Institute of Technology (MIT), Sloan School of Management.
  • Handle: RePEc:mit:sloanp:1805
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    File URL: http://hdl.handle.net/1721.1/1805
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Amihud, Yakov & Hurvich, Clifford M., 2004. "Predictive Regressions: A Reduced-Bias Estimation Method," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 39(04), pages 813-841, December.
    2. Hjalmarsson, Erik, 2005. "Predictive regressions with panel data," Working Papers in Economics 160, University of Gothenburg, Department of Economics.
    3. Cheolbeom Park, 2006. "The Persistence and Predictive Power of the Dividend-Price Ratio," Departmental Working Papers wp0603, National University of Singapore, Department of Economics.
    4. Lettau, Martin & Ludvigson, Sydney C., 2005. "Expected returns and expected dividend growth," Journal of Financial Economics, Elsevier, vol. 76(3), pages 583-626, June.
    5. Campbell, John Y. & Yogo, Motohiro, 2006. "Efficient tests of stock return predictability," Journal of Financial Economics, Elsevier, vol. 81(1), pages 27-60, July.
    6. Campbell, John Y., 2003. "Consumption-based asset pricing," Handbook of the Economics of Finance,in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 13, pages 803-887 Elsevier.
    7. Park, Cheolbeom, 2010. "When does the dividend-price ratio predict stock returns?," Journal of Empirical Finance, Elsevier, vol. 17(1), pages 81-101, January.
    8. Hjalmarsson, Erik, 2005. "On the Predictability of Global Stock Returns," Working Papers in Economics 161, University of Gothenburg, Department of Economics.
    9. Ang, Andrew & Liu, Jun, 2007. "Risk, return, and dividends," Journal of Financial Economics, Elsevier, vol. 85(1), pages 1-38, July.
    10. Ivo Welch & Amit Goyal, 2004. "A Note On 'Predicting Returns With Financial Ratios'," Yale School of Management Working Papers amz2465, Yale School of Management.
    11. Yakov Amihud & Clifford Hurvich & Yi Wang, 2004. "Hypothesis Testing in Predictive Regressions," Finance 0412022, EconWPA.

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