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What is the Chance that the Equity Premium Varies over Time? Evidence from Regressions on the Dividend-Price Ratio

Listed author(s):
  • Jessica A. Wachter
  • Missaka Warusawitharana

We examine the evidence on excess stock return predictability in a Bayesian setting in which the investor faces uncertainty about both the existence and strength of predictability. When we apply our methods to the dividend-price ratio, we find that even investors who are quite skeptical about the existence of predictability sharply modify their views in favor of predictability when confronted by the historical time series of returns and predictor variables. Correctly taking into account the stochastic properties of the regressor has a dramatic impact on inference, particularly over the 2000-2005 period.

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File URL: http://www.nber.org/papers/w17334.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17334.

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Date of creation: Aug 2011
Publication status: published as What is the chance that the equity premium varies over time? Evidence from regressions on the dividend-price ratio, with Missaka Warusawitharana, forthcoming, Journal of Econometrics.
Handle: RePEc:nbr:nberwo:17334
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